A sinking fund (also referred to as a capital works fund) is designed to help the owner’s corporations of a strata buildings to cover the cost of renovations or repairs to the building and its common areas. By regularly putting money into the sinking fund, the owner’s corporation can ensure that an amount of money is put aside for emergencies and expensive repairs or renovations.
With over 25 years’ experience in Body Corporate Compliance, Seymour Consultants have defined the below helpful tips to help Body Corporate committees navigate how to create comprehensive sinking fund forecasts.
What is common property in a strata scheme
Common property is that the part of the scheme land that is not part of the lot.
A lot means the separate, distinct area (owned by each lot owner) under a plan subdivision of the property on which the complex is built. For legal purposes, the body corporate is deemed to be the owner and occupier of the common property. Body corporate assets are items of real or personal property acquired by the body corporate. The assets are held by the body corporate in a trust for the lot owners. The body corporate must maintain body corporate assets in good condition.
The two types of format plans
Standard Format Plan
Body corporate responsibility:
- Maintain the common property in good condition
- Keep the structural parts in a sound condition.
- When there are dividing fences, the costs to maintain and/or replace are paid as follows:
• If the fence separates a lot and common property, the lot owner, and the body corporate share the costs equally.
• If the fence separates a lot and public land, the body corporate pays the costs.
Building Format Plan
Body corporate responsibility:
- Maintain the common property in good condition.
- Keep the structural parts in a sound condition.
- Maintain in good condition:
• Boundary railings on or near the boundary of a lot and common property.
• Doors, windows, and fittings in a boundary wall separating lots from the common property.
• Roofing membranes protecting lots or common property.
• Maintain in a structurally sound condition the schemes foundations, roofing, and supporting framework, including load bearing walls;
• Pay any maintenance or replacement costs for a dividing fence separating the common property from a lot or an adjoining property.
What does this all mean
At the Annual General Meeting, the owners are presented with the body corporate’s forecast budgets of income and expenditure to approve based on the budget and to:
- Fix the contributions that are levied.
- Set the dates for payment of the levies.
Developing your fund and fund forecast
The following is taken into consideration:
- List all the common property
• These may include letterboxes, intercom, lighting, swimming pools, pool heaters and equipment, gardens, pergolas, driveways, waterproof membranes etc. - Estimate when repairs will be needed
• Estimate when repairs will be needed.
• Decide on a time frame for repair work.
• Review guarantee or warranty information, where available, to establish a timeline for items such as repainting, automatic doors, and intercoms. - Estimate costs
• Investigate the cost of replacing items and future repair costs. - Consultation
• It is important that whoever is preparing the Budget that they must consult with the On-site Manager, Committee member, or Body Corporate as they will have important information as to the history of the building and knowledge about future planning.
Sinking Fund Excess
• The Strata Manager is to be aware of any special requirements for a minimum balance in the forecast.
• Review the levy to establish if the levy is realistic for the type of property.The Strata Manager is obligated to inform the committee of the excess funds projected in the forecast, whilst at the same time proposing recommended options such as: - Obvious omissions.
- Reduce levies (Not recommended unless the forecast is unrealistic).
- Freeze the levy increase or total levy for a certain number of years.
- Reduce the levies in proportion to an increase in administrative expenditure.
- Undertake whatever upgrades/renovation works are required and have the Sinking Fund Forecast reviewed and strike new levies accordingly.
Some shortfalls include:
- The Strata Manager is to be aware if the forecast is going to have a shortfall and what items are specifically attributed to the shortfall.
- The Strata Manager is obligated to inform the committee of the shortfall in funds projected in the forecast, whilst at the same time proposing recommended options such as:
- Increase the levies to cover the shortfall.
- Introduce a special levy.
- Establish the main cost items and look at remedial options, for example, painting:
- Establish if the building re-painting can be extended or possibly wash-down be utilised.
- Investigate the painting option where the building is painted but the payment schedule is extended over a 4/5-year period.
- These options could also apply to common area internal upgrades.
Major long-term items
- The following items are deemed to have a lifetime overall life and are often not included in the forecast.
- Lift maintenance contract. Note: Some contracts include for motor/ pulley upgrades.
- Overhead and underground electrical cables.
- Electrical distribution gear.
- Air-conditioning ductwork and platforms.
- Water/gas/fire piping.
- Roof tiles, sarking, and insulation.
- Cement screeding to floors and plastering to walls.
- Garbage chute liners.
- Pool Structure (Excluding finishes).
Frequently asked questions
Is the replacement of windows and doors to balconies the responsibility of individual lot owners?
In Queensland, the replacement of windows and balcony doors is the lot owners’ responsibility and in New South Wales it is the Owners’ Corporation.
Is the maintenance of a balcony balustrade to an individual lot, the owner’s responsibility? (QLD)
The maintenance of the balustrade is a body corporate responsibility. Under the Builders Units and Group Titles Act – “the body corporate duties regarding common property include maintaining in good order and condition the protective barriers on or near the boundary” (e.g., Railings, parapets, balustrades of the lot and common property …)
Why does the sinking fund allow for the replacement of roof waterproofing after 10 or 15 years when a 20- or 25-year guarantee is given?
Unfortunately, the guarantee is usually a product guarantee and does not cover faulty workmanship. It is generally the workmanship that causes the membrane to fail.
Things to remember
- The Sinking Fund Forecast or Capital Works Fund must be reviewed at least every 5 years; however, we recommend these be reviewed every 3 years and perhaps sooner given the sharp rise in material costs.
- The forecast or fund is not a Bank. Do not hoard excessive amounts of the owner’s contributions.
- Administration funds and forecasts cannot be transferred.
- Forecasts or funds cater for capital expenditure in the current year and a reserve for anticipated major expenditure in the next 9 years.
- Administration funds cater for short terms items occurring annually or within a 12-month period e.g., annual insurance premiums, common electricity, wages, pest control, life maintenance etc.
- Use a Quantity Surveyor to prepare the Sinking Fund Forecast.
For assistance with specialist strata and community title law issues, contact Seymour Consultants. To discuss your property’s strata management needs or receive a FREE management proposal contact our friendly team. We also offer more helpful resources and community living news in our FREE newsletter.
