Can a building manager help reduce sinking fund levies?
An important element in the management of a body corporate is a quality sinking fund forecast. This forecast gives a body corporate confidence to plan its capital expenditure over time, knowing that the funds will be there when items need to be repaired or replaced.
A sinking fund forecast is an actuarial calculation combining an assessment of which items of the common property require repair and replacement at a future time, and an understanding of how much it will cost to undertake the repair and replacement at that future point.
The resident manager is a valuable resource to the body corporate when it comes to the sinking fund calculation. The on-site manager is not only knowledgeable about works recently completed and aspects of the building or common property that will soon need repair or replacement, but they have unique insight, unavailable to the external professional, about the desires of the committee and lot owners. Some communities will be forward thinking, always keen to undertake major works to keep the value of their building high, while other communities may be more conservative and prefer to keep expenditure limited to the essentials.
Though most discussions about sinking fund levies occur when there is insufficient money being raised, there can be times when the sinking fund gets so large it might be inappropriate to keep the levies at a level.
This can occur for several reasons:
– Sinking fund forecasts are based on an assessment of when capital works will be undertaken, and the assessed timing is rarely followed to the letter and items will get deferred until the committee feels the work is really needed;
– The price of materials will fluctuate, affecting the accuracy of predictions made a number of years ago;
– Levies may have been set at a level to allow for a large expenditure at one point and have since been maintained at that level after the work is complete.
These factors can lead to a large, cash-rich sinking fund that is entirely out of proportion to anticipated expenditure. Though this is preferable to having insufficient funds, levies that are unnecessarily high might reach a level that proves unattractive to potential investors. If this is the case in your body corporate, the management trio of the committee, building manager and community manager should consider whether it is appropriate to reduce levies, and to what extent they should be reduced.
The setting of the levy in the sinking fund forecast must take into account:
1) Anticipated and provisional expenditure
2) The nature of the building
3) The age of the building
4) Recent work
5) Changing costs of work and materials
6) Whether the body corporate would be prepared to undertake debt financing instead of funding solely for the sinking fund
Traditionally, bodies corporate have been reluctant to embrace debt funding for sinking fund items. However, there are sound reasons for each body corporate to consider whether a mix of debt and equity is the best way for the body corporate to plan and then fund capital repairs and maintenance.
The person who prepares the sinking fund forecast will make a recommendation, but this is open for discussion and the approval of the committee. As each building is different, both physically and in terms of the attitudes of people who make up the community, the committee should use all resources available to it, including the insight of the resident manager, in deciding what is appropriate for that community. Over time the committee, with the advice of experts, will get a feel for the level of funds required.
The other side of the levy setting coin is the reaction of lot owners. Though a substantial decrease in levies will please them one year, if you find the levy has been reduced too much, raising it again the following year has the potential to cause friction within the community. Therefore, if you do find yourself in the situation where your sinking fund levies can be reduced, it might be sensible to reduce them incrementally rather than risk an about-face the next year.
The most important thing to do is to engage an experienced professional to provide your sinking fund forecast, one who is willing to engage in a conversation with the committee and building manager to ensure that you have the most appropriate levies set to protect all lot owners.
