Sinking funds make good sense
Planning for the future is always a smart move. Bringing the future into the present, assessing it, then making plans to do something about it later makes perfect sense.
The same goes for corporations. Planning for the future is a necessity because, apart from regular building and grounds maintenance, it is inevitable that:
- all buildings will require major non-recurrent works eventually, usually from 15-50 years in the life of the building; and
- the funds to cover these works will be payable by the lot owners.
We all need a little work as we get older. But what if the unexpected happens? Actually, not what if… but when? It pays to be prepared for the unexpected and it can be far less stressful for owners if there’s a plan already in place.
Realistically, how would owners pay for expensive, unexpected capital works? The common options would be:
1. raising a special levy;
2. arranging a strata loan; or
3. utilising savings from a sinking fund.
Raising a special levy could place financial burden upon some owners, especially those on fixed incomes. Worst case scenario, some owners may need to sell their assets just to make the levy payment.
An unsecured strata loan could be arranged to pay for works however interest rates and repayments may be quite confronting for owners.
The most effective method is to accumulate funds steadily over time via a sinking fund. The greater the accruals, the less the shortfall in reserves will be when the funds are required.
Time to review your sinking fund budget
Don’t be overwhelmed with budgeting. One of the duties we perform, as your trusted Community Manager, is to present these options to you for discussion at the Annual General Meeting each year.
When it comes to preparing and budgeting for major works, we work with lot owners, and seek professional assistance when necessary, to prepare a schedule of non-recurrent works required in the next 10 to 20 years. Then plan a budget to best cover these works.
What the law says
Strata and community corporations, other than small corporations of 6 lots or less, are required to prepare budgets for longer-term maintenance and capital works. This is explained in Sections 113 and 116 of the Community Titles Act.
Medium-sized corporations (between 7 lots and 20 lots) must prepare a 3-year sinking fund budget and review it every 3 years.
Large corporations of 20+ lots require a 5-year sinking fund budget for longer-term maintenance and capital works and this must be reviewed every 5 years.
Small corporations with 6 or less lots, and community corporations with common property insurance cover of $100,000 or less, are exempt from the requirement for these longer-term sinking fund budgets.
As Community Managers we actively review annually at each AGM the Sinking Fund forecasts for all Corporations. Despite not being a requirement by legislation, we encourage and assist smaller (6 and less lots) with the same proactive processes.
If you have any queries regarding budgeting, chat your Community Manager for more details.