Maintenance funds, or sinking funds as they’re known in Queensland, are a form of insurance. It means a strata community has enough money in the bank to pay for future repairs, maintenance and improvements to your most important asset – your home!
These funds are a way for residents to save for this sometimes very costly expenditure over time, without having to ask lot owners to pay over and above their regular levies through a special levy.
Over a period of time, a large amount of money (which should be earning interest!) is accumulated in this account and it might be tempting to lower levies to reduce the amount of money going into this pool.
Before the committee does this, there are a number of important factors to consider.
First, a body corporate/owners corporation must have a fund forecast projected out to 10 years. This means anything which needs to be repaired, replaced, maintained or improved over the next decade should be taken into account and planned for.
However, there are times when the sinking/maintenance fund itself can get so large it might be inappropriate to keep the levies at that level.
These fund forecasts are rarely followed to the letter and items will be deferred until the committee feels the work is really needed; fluctuations in price of materials will also affect the accuracy of predictions made three, four or five years ago; and sometimes levies are set at a level to allow for a large expenditure at a point and are then maintained at that level after the work is complete.
Any of these can lead to a large, cash-rich sinking fund with low anticipated expenditure in the short and medium term so it can be tempting to substantially reduce levies as a result.
But there are five factors to take into account:
1) Anticipated and provisional expenditure – this is where a thorough and effective sinking forecast is vital
2) The nature of the building – for example, a multi-storey building has lifts, which are very costly to refurbish or replace
3) The age of the building – just like anything, the older the building, the more it costs to repair and maintain in good order.
4) Recent work – Repair work on an asset might extend its life, but the cost of future replacement still needs to be taken into account
5) Changing costs of work and materials – sadly, inflation is a part of life and in most cases the cost of materials and labour is likely to go up, rather than down.
Because of these specific factors, we always recommend an experienced professional, like the team at Star BMS to prepare sinking fund forecasts.
It might be that a reduction in the levies is sustainable without risking a shortfall in financing future works.
But resist the temptation to cut levies by a significant amount. There is nothing more upsetting to lot owners than yo-yoing body corporate levies as a result of imprudent forecasting.
If a committee determines that levies should be reduced, it is wiser to do so incrementally rather than reduce too much and then have to raise levies again.
The most important thing to do is to engage an experienced professional to forecast your sinking fund levies. One who is willing to engage in a conversation with the committee to ensure that you have the best and most appropriate levies set to protect all lot owners.