There’s a lot of talk around at the moment about rent and mortgage support, to help individuals and families whose income has been hit by the coronavirus.
We touched on it in the answer to this post in the Forum, where we point out it’s not as simple as saying “Ok, take a break from paying your levies this quarter.” Why? Because no money coming in could mean, for a lot of strata schemes, no money to pay for everything from electricity to cleaners and concierge services.
OK, but what if the owners don’t have enough money coming in to pay levies? Our sponsors Lannock strata finance outline the challenges facing strata schemes and you, the owners, plus your options in how to deal with them.
The Lannock guide to surviving the pandemic
This guide is to help strata owners and managers deal with the important cash flow decisions that will arise during the Coronavirus pandemic and its aftermath. It covers what to do about the payments that the corporation needs to make and the various ways of funding those payments.
Payments by the Strata Corporation
There are three simple options available:
- Don’t pay anyone
- Work out a way of paying some people something
- Pay everyone.
Our very strong view is that these times require all corporations to make all payments to all creditors.
If payments are not made, people suffer and as a community, if we don’t keep making payments to our creditors, we’ll just be adding to the economic distress. As the government says “we’re all in this together”.
The vast majority of payments that a strata corporation makes are to small businesses. The cleaner, the gardener, the guy who fixes the lights, etc. Even apparently large contractors engaged on large capital works on buildings are paying a multitude of subcontractors, all of them individuals with families who rely on being paid.
Levies (or fees)
In normal times, people look to the legislation to give guidance on how to structure levies (aka fees in some states). All states have legislation that requires the corporation to raise levies in order to meet its outgoings.
But this is a time for common-sense and practicality, mixed with empathy and compassion.
It’s also a time to recognise the obvious which is that all corporations are different, they are composed of different people with differing financial situations and views and so there can never be a “one size fits all” approach.
Interest on Levies in Arrears
Each state has a method of setting the interest rate that can be charged by the corporation to owners with levies in arrears.
We would like people to think very carefully when considering how to apply this charge.
There is a very good financial principle that people who can’t pay on time should be charged interest. But in these circumstances, each corporation should consider the extent to which, in their particular and specific situation, to charge interest is appropriate or just has the effect of transferring additional costs from the haves to the have nots. The haves will pay their levies on time. The have nots can’t.
What is the right thing to do in your particular community?
One option is to carry on as normal and assume that levies will continue to arrive in the corporation’s bank account. These are not normal times so that doesn’t make sense.
Another is to review the likely default rate in paying levies and set the levies higher so that sufficient funds are raised after accounting for the non-payers. If you think that half the people in your community won’t be able to pay, then you could set the levies at double the amount.
In theory this would work but it has many problems. People who can’t pay the (increased) amount are unfinancial and so can’t vote and that’s not fair in these circumstances. It also creates a problem down the road – some people will have paid more than the “usual” amount and will want reimbursement whilst others will be way behind. Eventually this will need to be balanced out.
Another levy option is to reduce or defer levies and fund the corporation by the other means outlined below.
If not from levies, where can the money come from?
Special levies are out for the duration. Except for a small number of very unique situations, take them off the agenda. If people can’t afford normal levies, a special levy is just asking for your arrears to increase.
Sinking Fund / Maintenance Fund / Capital Works Fund
If you’ve got it, use it.
Each state has different rules about how, when and what amounts in a sinking fund can be transferred for general use so you will need to talk this through with your strata manager and perhaps your strata lawyer.
However, no matter what the state rules are, we think everyone should just be pragmatic and use whatever funds are available.
Whilst state strata legislation may throw up a few impediments, there are good economic reasons to use your sinking fund.
First, it does not require any current cash contribution from owners. Later on you’ll need to re-consider what the appropriate balance should be, but at this crisis time, use the cash that’s already available.
For most corporations and for the majority of owners, a sinking fund is the most expensive money that they have. Taking into account opportunity cost and tax, a sinking fund is not an efficient means to fund your future capital works. It makes sense to use the money that costs you the most first before working your way through to the less expensive forms of funding.
As a lender, Lannock is very attuned to the benefits of borrowing.
Cash is available when you need it. All creditors can be paid which means that those people can in turn meet their obligations, and so on. Levies can be structured so that no-one is unfinancial and loses the ability to vote in a general meeting.
Refer to Levy Assist for more information on how Lannock can provide your strata corporation’s working capital over the term of the virus. We have waived all fees on our working capital lending so you will only pay for what you use when you use it. It also means that if you set the facility up as a financial safety net and never use it, you won’t pay a cent.
Some of the decisions that flow from this can be made by the strata manager and some by the treasurer or strata committee.
However, generally, as a principal of good governance, financial decisions should be made or ratified in a general meeting.
And it’s not just a matter of good governance, it is to be preferred so that all members of the community are aware of the issues and can participate in the decision making.
We recommend you start working on these issues now with a view to holding a general meeting in the next month or so.
- Pay your bills – team Australia needs it
- Forget about special levies for the present time
- Think carefully about whether, how and why you apply the interest rate on levies in arrears
- Use your sinking fund
- If you need the funds or want a back-up just in case, set up a working capital borrowing facility such as Levy Assist
Working Capital Loans for owner corporations – Lannock (click here).