In a strata scheme, the sinking fund is a crucial aspect of financial management, as it is the fund set up to cover major capital expenditures and repairs of the common property. Adequate funding of the sinking fund is essential to ensure that the property is well-maintained and that any necessary repairs are carried out in a timely manner.
However, there are consequences to both under-funding and over-funding the sinking fund. If the sinking fund is underfunded, there may not be enough funds available to cover necessary repairs and maintenance, and this can lead to a financial burden on the residents. The body corporate may have to impose a special levy or borrow funds to cover the costs, which can cause financial hardship for some owners.
On the other hand, over-funding the sinking fund can lead to inefficient financial management, as excess funds are not being utilised. This can result in residents paying higher levies than necessary, which can erode trust in the body corporate’s financial management – strata management company.
To avoid the consequences of under-funding or over-funding the sinking fund, the body corporate must have an accurate sinking fund forecast. This is a document that estimates the future expenses of the scheme, including both recurrent and capital expenses, and the funds required to cover them. The sinking fund forecast helps the body corporate plan for future expenses and ensure that there are adequate reserves to cover them.
Regular reviews of the sinking fund forecast are essential to ensure that the levies are fair and reasonable and that they accurately reflect the needs of the scheme. For larger schemes, cost planning is done annually with a qualified QS to ensure accuracy and adjustments for short to medium-term expenditure and an adequate projection. The body corporate must also ensure that there are adequate reserves, buffer, to cover unexpected expenses and repairs. This will ensure that the sinking fund is properly funded and that any necessary repairs are carried out promptly and efficiently. Adequate funding of the sinking fund and regular reviews of the sinking fund forecast are essential to ensure that the common property is well-maintained and that any necessary repairs are carried out promptly.
It is essential that the Sinking Fund levies are projected accurately from the commencement of a scheme, and this can even go back to when the owner first bought off the plan. Historically, many developers have unfortunately been misguided by their sales team to have “low body corporate fees” and, therefore, we have found the majority of new schemes have under-collected and often see sharp rises within a few years. By ensuring proper consultation and proper advice on cost planning, realistic sinking fund levies should be proposed for a new body corporate that can avoid financial burdens and dramatic increases on owners. This will help maintain trust in its strata management team and ensure the longevity of a strata scheme.
Effective cost planning is crucial to the success for every strata scheme.
If you need any advice or query on your sinking fund, please don’t hesitate to contact us on 0400 161 659, or admin@olivetreeconsultinggroup.com.au.