That sinking feeling … and why funds run dry


It’s something of a cliché – the ageing apartment block crumbling slowly before your eyes while the oldies on the committee zealously guard the plump sinking fund (as it used to be known) wrongly thinking it’s a nest-egg for their kids or grandkids.

Like many apartment-living clichés, it’s only partly mythology and mostly based on strata dwellers’ bitter experience.

Another urban non-myth concerns the modern block that has nothing in the capital expenditure fund (NSW) or maintenance fund (Vic) or sinking fund (Qld) because the new owners don’t see why they should be paying money to fix problems that don’t exist yet.

The different names are not the only distinctions between the two states.  In Victoria only buildings with more than 100 lots, or income from fees over $200,000, must establish a 10-year maintenance plan.

Smaller schemes “may” create one but, regardless of the size, once they have approved their own plan, owners corporations must create a fund to pay for it.

In NSW only two-lot strata schemes, where the buildings are physically detached from each other, can be exempt from devising a 10-year maintenance plan and creating a fund to finance it.

In Queensland, the forward projection is for nine years. Why?  Because it’s Queensland.

But even with all these rules and regulations, conditions and exemptions, the weird thing is that nowhere are you legally required to employ a professional to assess your likely needs over the next decade.

A committee can ask any owner to make an estimate of future wear and tear, which they then approve.  And that’s where the demographics of your building come into play.

Generally speaking, an over-abundance of retirees on fixed incomes can be bad news for the finances of your building.  They are often more likely to approve a cheap-as-chips maintenance plan, because levies (fees) will be going up when their income isn’t.

They are also less likely to be swayed by arguments that good maintenance of common property increases the value of their individual lots, especially if they aren’t planning to sell any time soon.

Too many investors in a block are often looking to maximise their profits through higher rents and lower levies.

Commercial holiday letting hosts aren’t exactly known for their over-active community spirit, so don’t expect them to dig too deeply into their tourist dollars to fund future lift repairs (despite claims that they multiply wear and tear by a factor of four or five).

And first-time apartment owners will be enduring enough of a culture shock, with by-laws and ordinary levies, without having to contemplate payments for things that might never happen.

In any of these cases, the committee or individual preparing the budget may find there’s considerable pressure to pare the plan to the barest of bones.

So who’s most likely to get it right by creating a sensible plan and devising a budget that provides the necessary funding?

In short, it’s people who “get” apartment living; owners who are there for the long run and know that nothing reduces the value of a building –  or the quality of life – faster than neglect and short-term thinking.

They could be retirees, young professional or first-timers who’ve defied the odds to get into the property market and want to make the most of it.

And how do you find these blessed blocks when you’re looking to buy? Check the accounts for a healthy maintenance fund, from which money is being spent, and a forward plan that’s more positive pragmatism than wishful thinking.

Buy into a building like that and you’re home (almost) free.

A version of this column first appeared in the Australian Financial Review.

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