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Sinking Fund Rules Sunk

For as long as builders have been putting up apartment blocks, some owners have thought they were on easy street: apartment blocks didn’t require maintenance, weren’t affected by weather or time and, even if they were, the next guy could cop the bill.

Then the State Government, in its finite wisdom, brought in a law that means every strata building in NSW must eventually have a 10-year sinking fund plan to predict accurately how much money will need to be salted away to keep a building in a proper state of repair. Problem solved?

Well, no. Not even close, according to a bunch of strata managers who contacted us this week from Port Stephens.

“Even if you undertook to obtain a professional Sinking Fund Analysis it must be remembered the morons in Macquarie Street have forgotten to make it mandatory to adopt the budget recommendations,” says our Strata Manager reader, whom we’ll call Sam.

“There is no legislative provision that forces Owners Corporations to adopt the recommendation and many don’t, some even opting to contribute as little as one dollar per annum (which, amazingly, is not in contravention of any provisions of the Strata Schemes Management Act),” continues Sam.

“The whole thing is a waste of time, drafted by morons who don’t understand why OCs should be forced to review flawed budgets put forward by developers and seek professional advice from quantity surveyors to bring capital contributions in line with realistic expectations.”

Sam makes sense; if strata owners are too short-sighted or selfish to organize proper sinking funds, merely forcing them to work out how much they might need – and they don’t even have to hire a professional to do so – isn’t going to make much difference.

So what was the point of the law change? Perhaps a manadatory fund would have undermined the Government’s convenient myth that the biggest problem in strata is little old ladies being monstered out of their savings by spendthrift ECs.

Buyers beware – if the levies are low it could mean big bills are just around the corner.

If you’ve been caught in the “low levies ” trap – or have any other strata problem to raise – email flatchat@jimmythomson.com or log on to www.jimmythomson.com/flatchat for previous columns.
NOT-SO-EASY STREET

I enjoy reading your column. It is one of my regular stops in the Saturday SMH.
I am going to take issue with the strata manager and compulsory Sinking Fund Levies.

The problem is not the fact they are not compulsory – They are. The problem is that some strata managers are hesitant to push the matter because there is no “big whip”.

Unlike the Income Tax Assessment Act or ASIC there is no Government authority monitoring the conduct of Owners Corporations. The only time an Owners Corporation will be brought into line is if someone takes them to the CTTT ie. a disgruntled owner. All strata managers can really do is recommend compliance with the Act.

The law seems to be pretty straightforward

Strata Schemes Management Act
Sec. 75 – requires Owners Corporations prepare spending estimates
Sec 75A – the new section – requires Owners Corporations prepare 10 Year Sinking Fund plans (see also Reg 30A for timing of implementation)
Sec 76 – requires levies be in accordance with estimates

links to the Act and Regulations are on our site http://www.opr.com.au/links.htm
As part of our work we obviously see a range of approaches to the Sinking Fund issue and your regular railings against developers are, in particular, quite justified.

One of the things I have been exploring is a pro-forma spreadsheet for curious unit owners to play with 10 Sinking Fund plans for their own buildings. The idea being that anyone with internet access can have a bit of a play at producing something similar to a professional report, before they push the formal approach down the throats of the owners/committee.

The spreadsheet is very plain. My dad could download it to his vintage spreadsheet program.

It is still in draft form but if you are interested have a look at the project. http://www.opr.com.au/assets/SinkingFundAssessmentProFormaDraft.xlw
Obviously it would be a free resource downloadable from our website and we would put a few more detailed samples for people to use in their own buildings. .

Gus Kernot
O’Connors Property Reports

Yes, it’s confusing. I didn’t realise that there WAS a compulsion on OCs to adopt the estimates and set levies accordingly. The problem seems to be that there is no compulsion to make sure the assessments are realistic, let alone compiled by a professional. But the end result is the same – some buildings are still keeping levies low while the next generation of owners will be the ones to foot the bill. Perhaps there should be a benchmark calculation – based on something like your spreadsheet – and then, as part of any documentation released when an apartment is sold, all buildings have
to explain why their sinking funds and levies are more or less than the calculation. The fact that a professional assessment was made would be a valid reason for any discrepancy – “we wanted to keep the levies low for first generation investors ” would not.
– JT

BETTER THAN NOTHING

Just thought I would comment about your article about Sinking Fund assessments.

Sam, your Strata Manager from Port Stephens is correct about the flaw in the legislation. However, it is better than we have ever had before and yes there needs to be a change to the legislation to make it mandatory to adopt the assessment. I believe that the majority of Strata Schemes will adopt the assessment. I know form our portfolio of around 1300 schemes my Managers have only had a handful of groups that are postponing the assessment and as yet none have said no to adopting it. I must say we are not telling people that there is no requirement to adopt it either. For those group that are silly enough to say there is no requirement to adopt it put themselves now in a very easy position to be sued by an incoming owner for not setting the sinking fund at an reasonable level. The Act has always said that the sinking fund must be reasonable and setting the sinking fund at $1-00 could not be classed as reasonable and so they have always left themselves open to be sued. In the past it was a little complicated , but possible. But now if there is a valuation for the sinking fund in the Owners Corporation records and they don’t adopt it an incoming owner will be very easily able to sue the owners corporation for not setting the sinking fund at the recommended level.

Merry Christmas
Richard Tooker
NSW Strata Management.

I’m getting various responses on this, including one that quotes the Act to suggest that implementation of the estimates is mandatory (see above). The other issue is that it seems to be possible for any member of the EC to do their own estimate and come up with a ridiculous figure. Obviously, this needs a little clarification, one way or another. – JT

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