‘Sinking Fund Forecasting’ is the process and activity of setting aside revenue over a period of time, to fund a future capital expense, or re-payment of a long-term debt…
Sinking Funds & Sinking Fund Forecasts
Owners of a corporation of a strata titled development usually set up a sinking fund to cover the costs of future capital expenses, which include for example, painting the building, driveway refurbishment, replacement of common property items like carpets, roofing and guttering and lift overhauls.
What exactly is a Strata Title?
Strata Title is a system for handling the legal ownership of a ‘portion’ of a building or structure. These ‘portions’ can be made up of many different styles ranging from units, townhouses, villas, commercial offices, factories, retail shops, etc. Strata titles exist in many different types of developments, including;
- retirement villages
- caravan parks
- mixed use – i.e. retail and/or commercial and/or residential
- serviced apartments
The owners corporation is responsible for protecting the development assets by ensuring all maintenance and repairs are carried out when needed. They look after all aspects of the Common Property of the Strata Scheme. The owners corporation must repair common property whilst owners are responsible for any repairs within their unit or ‘lot’.
What is considered Common Property?
As we all know, repairs and defects can develop at any time and, as a building ages, repairs will be needed. Careful planning is essential from the beginning to ensure that appropriate allowances for replacement and repairs have been accounted for. Many Strata Schemes, for a variety of reasons, may find themselves in the position where money is desperately needed to pay for essential repairs or renovations but the bank account is ’empty’.
An example of some of the ‘common area’ items are:
- building facade repairs
- cracking to walls and subsidence
- pool facilities
- carpet replacement
- common property painting and maintenance
- roof replacement
- concrete driveways and paths
- guttering replacement
- fire safety equipment
- lift upgrades
- balcony repairs
How to ensure that sufficient funds are retained?
In past years, it was very common for many owners corporations to avoid looking to the future or minimising their sinking funds to the eventual detriment of all the owners in the scheme. Therefore the outcome was that when the time would come when something had to be either replaced or repaired, there were no funds in the sinking fund to do the job. The Owners Corporation therefore had no other option but to raise a Levy asking for money to fix whatever had to be fixed. Now, when this situation occurs there are a couple of options open to the Owners Corporation including:
Types of Strata Levies
Strata Levies must be determined and administered by the Owners Corporation with levy notices being issued on a regular basis. Strata Schemes should impose a regular strata levy, recommended to be collected quarterly, on all the lot owners. The money collected is deposited into the strata scheme’s trust account and is then used to fund the running and maintaining of the strata scheme.
The 3 types of Strata Levies:
- Administrative Fund Levies – to cover the day-to-day running expenses.
- Sinking Fund Levies – for long term repairs and maintenance
- Special Levies – for all those unexpected expenses where no funds were allocated.
Sinking Fund Levies (Sinking Fund Forecasts)
The Sinking Fund, also under the control of the Owners Corporation, is essentially a large capital expenditure fund that pays for both expected (long term) and unexpected replacement, repairs and maintenance. Working out just how much to allocate towards these unexpected events is not an easy task and this is where the help of some experienced and knowledgeable people is required to ensure the Sinking Fund does what it’s supposed to. It is recommended that Quantity Surveyors provide a detailed cost account and lifecycle for the forecast replacement of the item. By handling the sinking fund properly, the owners of the scheme may never have to face the dreaded Special Levy, since sufficient funds should always be available.
Contact Accord Quantity Surveyors today to organise a Sinking Fund Forecast or to update your existing Sinking Fund Forecast. We’re experts in construction estimating and life cycle costing.