This article about sinking fund forecasts in the time of COVID has been written by Leary & Partners.
Pundits agree, the Queensland government’s initiative to allow unit owners temporary sinking fund levy relief creates more problems than it solves. It is possible however for unit owners to manage contributions to sinking funds more effectively, and in some cases reduce the contributions – often substantially.
Information is power and in times of great uncertainty, good quality information is essential. It doesn’t make a lot of sense for bodies corporate to postpone obtaining sinking fund forecasts, or updates to existing forecasts, during this pandemic.
It is undoubtedly true that some lot owners are experiencing financial hardship right now. However, burying their heads in the sand will not make the problem disappear. It makes far better sense to re-examine sinking fund parameters to see if the changed economic circumstances have a corresponding flow-on effect on sinking fund contributions.
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- For example, inflation in the construction industry has reduced substantially in recent times. If a forecast was produced a few years ago, annual inflation was probably calculated at about five times the current rate. It’s not prudent to assume that today’s level of inflation will continue into the distant future. However, a low rate of inflation is likely to be here for some time. A corresponding recalculation based on this new information is appropriate.
- The same is true for bank interest rates. A professionally prepared forecast will take into account interest earned on estimated bank balances and taxes paid on that interest. A forecast prepared a few years ago will probably include an interest rate that is two or three times what is achievable today.
A new forecast that takes into account the current rate of inflation and present-day bank interest rates will likely result in lower contributions.
Internal and external painting are typically among the largest expense items in any sinking fund forecast. The timing for repainting is frequently subjective. I am not suggesting that repainting a surface which has paint severely degraded and peeling off over large sections can be deferred for an extended period. However, for many surface treatments, an intervening clean down will suffice. If this is the case for your particular property, pushing the painting out for a couple of years may reduce the contributions significantly.
There is another frequently overlooked fact about leaving forecasts unreviewed for an extended time. Sinking fund forecasts are based on estimates. Estimates are frequently conservative because of the uncertainty of predicting well into the future. We often see forecasts that have been prepared by other service providers that are over-funded. This happens because the report writer took an overly pessimistic view regarding the timing and frequency of large cost items such as external painting. Paint finishes generally last longer today than they did several years ago. When levies are calculated to accumulate funds for a large expense item which is not required until several years past the forecast date, excess money accrues in the bank. All it takes to reduce unnecessary contributions is to recalculate the forecast with more accurate information.
The current change in circumstances may provide your body corporate with an opportunity to reduce their sinking fund contributions. I strongly recommend they approach a respected quantity surveying firm with extensive sinking fund experience to prepare or update their sinking fund forecast.
David Leary
Managing Director
Leary & Partners
E: [email protected]
This post appears in Strata News #390.
Have a question about updating sinking fund forecasts and maintenance plans or something to add to the article? Leave a comment below.
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My comments are about the Admin and Capital Works funds in general. I was hoping for some advice?
I live in NSW in a Townhouse complex of only 3.
The current owner in one unit wants to sell. They only brought the unit 12 months ago and have completely renovated the unit over that period. They never lived in the unit in that time.
At our AGM they stated that they cannot pay any real increase in the Strata levies plus they will not be able to sell if we increase the fees. ( I think it’s all BS to me ). I should be against the Act to manipulate the fees so you can sell a unit. The approval of all these renovation is another issue I wont go into now.
Plus this owner and all pervious owners in the complex always never want to follow the 10 Year plan. We have had repairs and maintenance done but they always kick and scream to have works completed.
The past 12 months we spent $7,500 on waterproof failure to the shower, just happened to be unit 2 the one up for sale ( to add to their renovation after ) and then several repairs to fascia and barge boards to several areas on all 3 units.
Hence our capital works stood at $2,500 as at the end of July.
At our just passed AGM they only approved $3,500 into the Capital Works Fund. 2-1 vote, I wanted more. We need to build the fund up again. The current plan suggests we should have $10,000 in it as at 30May 2020.
They have no interest in the future collections to pay for a whole list of items, like painting etc etc due in 4-5 years. To them we will not have any problems that need repair. Our block is 35 years old.
The same goes with our Admin Fund. we had a buffer in the fund to pay for Insurance currently $2,850. Our Financial year ends as at 30 May and insurance is due in August. So without the buffer the Admin fund would be in negative for a few months after. One way to help this out is that we are changing the Insurance period to be due yearly in February not August. However this first year we will pay to pay 1. and half years of premiums.
So what did the other owners do, reduce the use up all the buffer thus reduce the admin fees down.
The estimated budget this year is $9,300 we are going to collect $6,700 in fees. By doing this our Admin Fund will have 3 or 4 continuous months in negative amounts after paying the February Insurance policy.
Then at the end of May 2021 will again end up at Minus – $270 if all goes well and no major repairs happen in Electrical, Plumbing etc etc. Our budget allows $250 for electrical. An electrician charges $100 call out fee to start.
I’m totally frustrated at the year in year out being voted against what to me are a sensible approach to running a strata. Our Managing Agent doesn’t help my case when they stated they cannot give an opinion on the matters. They stated that they produce a reasonable budget then it is up to the owners to decide and will comment on whether my ideas correct and the other units views are not being a sensible responsibility.
I was thinking of going to the Department of Fair Trading but I cant see it being worth to effort.
Totally frustrated.
Hi Dean
As your question is detailed and relates to a specific situation, we are unable to provide advice. Responses can only be of a general nature. We suggest you seek independent legal advice from a qualified professional.
If you are not interested in seeking independent legal advice, the Department of Fair Trading may be a good option.
We would be happy to recommend someone to you.
I note David’s comment that “inflation in the construction industry has reduced substantially in recent times. If a forecast was produced a few years ago, annual inflation was probably calculated at about five times the current rate.” We are seeing the same reduction in annual increases in construction costs for insurance renewals. A few years ago it may have been prudent to accept an annual increase of 4 to 5%. The increase over the last 12 months is down around 0.8% – across Qld at least. Any scheme accepting an annual increase over 1% is just wasting their owners’ money, unless verified by a quantity surveyor for that particular building in that particular location.