Money makes the world go round
Money plays a big place in our lives and to deny so ignores a history involving money going to 5000 BC. It has been both a burden and benefit. Living in community property, whether that be strata scheme or company title, requires us to combine and use money for a common beneficial purpose. That’s how it is supposed to work. A great deal of my professional time is spent dealing with money received & disbursed and advising about how much money a strata scheme or company title requires to function properly.
When one does not have money, we want it and when we have it, often we don’t want to let go of it, or keep it for a rainy day. As this applies to individuals it also applies to Strata Schemes and Company Title properties.
Well run schemes budget properly and have sufficient funds available to meet day-to-day needs as well as large capital requirements.
There are thousands of sayings about money. One that caught my eye was “Buy when everyone else is selling and hold until everyone else is buying. That’s not just a catchy slogan. It’s the very essence of successful investing. –J. Paul Getty”
Another made me smile “I made my money the old-fashioned way. I was very nice to a wealthy relative right before he died. –Malcolm Forbes.”
One of the first things we learn when buying into a community property is that, in addition to the usual rates and taxes, we are obliged to pay regular quarterly contributions. I don’t know why that is a surprise because right from the get-go, we are educated about current and ongoing expenses incurred and paid by the scheme or company. Your lawyer or conveyancer would have told you as the completion approaches the state of the outgoings as they apply to you. Even when you attend an open house the real estate agent will have a copy of the contract plus a breakup of the contributions as applies to the lot being sold.
Whether you serve on a strata committee or are a shareholder in a company title building, it is in your interests to keep an eye on funds going in and going out.
As I said, at completion of the purchase these amounts form part of your settlement figures/payments and usually adjustments are made depending whether they are paid or unpaid.
Once the purchase is completed and the strata roll is updated when a Section 22 notice is received by the strata managing agent, you will receive a levy contribution notice. These are usually quarterly, and the payments are requested in advance. When annual general meetings are held, you should receive a set of accounts. You should learn how to read these accounts – as I always say, knowledge is power
Contributions are mandatory not discretionary and when collected they are deposited into your scheme’s or company’s bank account and then applied to the Administrative and Capital Works funds.
At outset of a strata scheme coming into existence, a registered a surveyor is engaged to draw up the strata plan and that will include in the common property plan a list of unit entitlement that applies to each lot. The unit entitlement is determined on a “market value basis” See Schedule 2 Requirements for schedules of unit entitlement –Strata Schemes Development Act 2015 (“SSDA”).
The schedule of unit entitlement states a lot’s individual entitlement and the aggregate of the unit entitlement of the scheme. The unit entitlement will vary in large buildings where there may be one or several penthouses. Clearly their value will be greater than say a unit that is one bedroom or a unit on a lower floor.
For those interested in how “Market value basis´ works see Regulation 7(3) which basically says “..the basis for determining the value of a lot ….. is to estimate the amount for which the lot …would be sold by a willing but not anxious seller to a willing but not anxious buyer.” This broad definition is a likely reason for so many disputes arising in relation to the amount of unit entitlement applied to a lot(s) in a scheme. Such disputes are costly because they usually result in disputes involving lawyers, valuers, real estate agents and other expert witnesses.
Section 79 of the Strata Schemes management Act
Section 79 of Strata Schemes Management Act 2015 (“SSMA”) speaks to how the administrative and capital works funds are estimated and when they are set, namely no later than 14 days after the constitution of the owners corporation and at each annual general meeting.
The administrative fund is used for actual and expected expenditure-
- To maintain in good condition on a day-to-day basis the common property and any personal property vested in the owners; and
- To provide for insurance premiums; and
- Meet current expenses.
Recurrent expenses include regular common property expenses such as insurance, water charges, electricity, carpet cleaning, lawn services and the like and minor expenses relating to maintenance.
The capital works fund again is set at the annual general meeting each year. In terms of a company title block, how things work depend on the terms of the company constitution.
The capital works fund is used for:-
- Painting or repainting any part of the common property; and
- Acquire personal property, and
- Renew and replace personal property, and
- Renew and replace fixtures and fittings that part of common property, and
- Repair and replace common property, and
- Meet other expenses of a capital nature.
Expenses of a capital nature include expenses in relation to major repairs to common property, or personal property of the owners corporation, such as replacement of roofing, guttering or fences or the like.
Estimating administrative and capital works funds
When estimating amounts needed to be credited to the administrative or capital works funds, the owners corporation must have before it, and take into account, a statement of the existing financial situation of the strata scheme and an estimate of receipts and payments.
Capital Works Plan
In estimating amounts to be credited to the capital works fund, an owners corporation is to take into account anticipated major expenditure identified in the 10-year plan for capital works fund.
For large schemes estimates must be prepare at the annual general meeting ;-
- The specific amounts in relation to each item or matter on which the owners corporation intends to spend money, or on which the owners corporation is aware money will be likely be spent in the period until the next annual general meeting, and
- A note of any difference between the estimates and the 10-year plan for the capital works fund and the reasons for the differences.
Large Schemes comprise of more than 100 lots and therefore anything under 100 lots is not a large scheme. When counting lots one does not include utility lots or lots used for parking.
Hopefully this article has summarised for you how some of your money comes in and goes round.