Definition: A sinking fund is set up by the owners’ corporation to cover the costs of future capital expenses, which could include, painting the building, driveway refurbishment, replacement of common property items like carpets, roofing and guttering and lift overhauls.
1. What is changing in NSW?
There are several changes outlined including:
1a) Identifying how the 10 year sinking fund will be funded.
This reform is designed to encourage schemes to actively consider how future maintenance and capital works will be funded.
The aim of this reform is to avoid situations where unplanned special levies or loans are needed to cover large capital expenses when more gradual contributions to the sinking fund over time might have been preferred by the owners’ corporation.
1b) Allowing for income earned by a scheme and any special levy to be paid into either the administrative fund or sinking fund.
Some schemes earn income from external sources, such as from rents, which must be paid into the sinking fund. This can result in excessive amounts accumulating in the sinking fund, which owners are not reasonably able to use. It is proposed to allow this income to be paid into either the administrative fund or the sinking fund. This will enable schemes to direct resources to where they are most needed.
When schemes raise special levies it is often to meet expenses of a capital nature that may not have been fully budgeted for, yet the current law restricts special levies to the administrative fund. This restriction will be removed.
2. How does it benefit me?
2a) The immediate benefit for owners in strata buildings is that if the owners’ corporation has set out 10 year plans, there should be no need for special levies for unsurprising costs. Everything should be detailed in the 10 year sinking fund, meaning the individual owner can plan for repairs and maintenance well in advance, not forcing them to urgently find funds for necessary building work.
2b) By removing the restriction on enabling the sinking fund to utilise funds more frequently, it will enable any essential and/or non-essential works to be carried or building upgrades or even beautification of the premises and its surroundings.
Any additional revenue going into the sinking fund will now be able to be used as necessary by the owners’ corporation.
By freeing up capital, it should result in special levies being allocated to those pressing issues that the sinking fund was established for.
3. What do I need to look for when buying a strata unit or residing in one?
3a) To make sure that there is adequate money put aside in the sinking fund. Also that any prospective work has numerous quotes in order to compare potential costs and warranties. Ensure that you have an input into what the sinking funds are allocated to either in a formal vote or a regular meeting otherwise you might find work happening that you don’t think is needed.
3b) You need to be sure of what funds are being spent and make sure that they are being paid for by an independent contractor who is either well known or has good references. Make sure that you are not paying over the top for a routine job and the work being done is needed.
4. How can strata finance help me?
Strata financing can help you get the funds you need quickly to undertake any urgent repairs work.
Strata financing has been established for the sole purpose of providing innovative loan products to strata schemes free of mortgage constraints. Strata financing has developed loan products specifically so building works can be undertaken without the need to raise lump sum additional levies from lot owners.
A strata loan can sort the situation out quickly so at the very least the building repairs are carried out, which will stop the cost blowing out. Of course, should someone be injured the issue of legal liability will come into play and if the owners corporation are deemed negligent if the area remains unsafe, the whole bill could become a lot more expensive.
Strata financing can be used to pay for any special levies raised because of juggling money between funds and even to pay for any unpaid levies. This also allows the scheme to remain financial while the debts are being secured. Once the debts are recovered, the loan can be paid out.
Strata financing allows for you to spread your costs over a number of years and eliminates the shock of that initial upfront cost, which many owners don’t have.
Pula Capital specialises in strata finance.