The thorny issue of strata funding

At last year’s Griffith University conference “Strata and Community Title in Australia for the 21st Century”, Paul Morton from Lannock Strata Finance gave a paper on “Strata Funding - A Practitioner’s Perspective”.

Strata funding can be one of the most contentious issues in a multi-occupancy complex (see our other article on this issue) - not only in terms of the fairest distribution of the costs involved in maintaining and running a building, but also in terms of how these costs are met: in advance, or as they occur, or some mix of the two.

In his paper Morton explained that the correct approach will vary from one complex to another and that no one option or solution is necessarily the best. He outlined the three options available to bodies corporate:

1) Sinking Fund (or ‘Reserve’ or ‘Maintenance’ Fund)
Morton pointed out that, even though the sensible and logical approach would be to put money aside on a regular basis from all lot owners to cover likely maintenance and repair requirements, sinking funds do have disadvantages as well. Firstly, in terms of fund cost, a sinking fund may be the most expensive approach compared to other solutions. Also sinking fund contributions are rarely adequately valued by the purchaser of a strata unit - in practical terms this means that the purchaser may not recompense the vendor for the true value of their contributions to the sinking fund and so a portion of this contribution is effectively ‘lost’ by the vendor.

2) Special Levies
Special levies are not liked by many strata unit owners - largely due to their unexpected (and often very expensive) nature. In essence when a special levy is sought, this can give out a message that the body corporate has been ‘caught short’ and has not planned adequately. Morton however points out that special levies can sometimes be the best way to go.

If you compare the situation of the owner of a house who needs to do some repairs, the only difference is that the timing of the repairs in a body corporate situation is not decided by the strata unit owner him or herself, it is imposed by the body corporate. Otherwise the situation is largely the same and - with a special levy - it is very clear what the money is going to do, a much more transparent approach than a sinking fund.

Morton continues the comparison between the strata unit owner and the house owner - asking the question ‘how many house buyers also buy a ten year repair and maintenance fund from the vendor?’

3) Strata Finance
A third option is strata finance, where a body corporate takes out a loan to cover repair and maintenance work that need to be done. This funding cost can be passed on to strata unit owners over a period of time, in more manageable amounts than a one off special levy.

Morton concludes by pointing out again that no one solution is necessarily the ‘right’ one, and that different individuals on a body corporate committee are very likely to have different views on the right approach to take, but in the end must always be mindful of the fact that their decisions will impact on other owners, who may not share their viewpoint:

“...it behoves us all to be very careful when we consider how or when we should make decisions that might impose our will on others and restrict their choices.”

He quotes a letter he received from the NSW Office of Fair Trading as being a very clear guide to how a body corporate should approach strata funding:

“It is important for all strata schemes to consider their long term capital maintenance requirements. Owner corporations have a number of options when it comes to funding such expenditure. They can gradually build up their sinking funds through regular levy contributions, raise one-off special levies or borrow funds when the need arises. It is appropriate that the decision as to how best meet their long term maintenance obligations is left to each owners corporation.”

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