Reserve funds should be allowed for in sectional title AGM budgets

It’s a balancing act that many trustees are faced with each year – how to ensure that the levies of the body corporate are sufficient to cover the operational expenses and provide for future repairs and maintenance, while time trying to ensure that the levies, and any increases, are not prohibitive.

“The Sectional Titles Act requires a body corporate to establish a fund “sufficient in the opinion of the body corporate for the repair, upkeep, control, management and administration of the common property, including reasonable provision for future maintenance and repairs,” says Martin Bester, managing director of Intersect Sectional Title Services.

However, in Bester’s opinion the last part of the statement is relative and vague and doesn’t specify what constitutes reasonable.

“Intersect has advocated the establishment of a reserve or sinking fund for years, as we believe this to be good practice. Now, several years on in certain cases, we are able to fund certain repairs and maintenance items without affecting ordinary levies and without requiring special levies or, at least, reducing the amount of special levies.

“At some stage the Sectional Titles Schemes Management Act (STSMA) will be enforced, which essentially replaces the management aspects of the Sectional Titles Act – which will all be repealed – with a more user friendly and simpler format.”

Section 3 of the STSMA differentiates between an ‘administration’ and a ‘reserve’ fund. It provides for establishing and maintaining a reserve fund in such amounts as are reasonably sufficient to cover the cost of future maintenance and repair of common property but not less than such amounts as may be prescribed by the minister.

Bester says that what amounts the minister may prescribe remain to be seen, but once the STSMA is in force, bodies corporate will be obliged to provide for the operational as well as the future expenses of schemes.

“Now is a good time for trustees to be considering the reserve or sinking fund. This is good practice and will also eventually become prescribed.

“There is no benchmark for how much should be in a reserve or sinking fund. So we suggest to our clients that foreseen major repairs and or maintenance expenses, such as repainting, be priced at current rates and escalated by a time factor. This will indicate the resources that will be required in the future at a specific time and will be a good starting point for calculating how best to achieve it. Moreover the fund should, at any time, be able to cope with at least 20 percent of annual expenses to deal with the unforeseen expenses or reasonable contingencies.”

Many sectional title schemes are now having their annual general meetings, or have just had them, so this is usually the time of the year when budgets are being prepared by the trustees and approved by the owners at the AGM for the new financial year.

Michael Bauer, general manager of IHFM property management company, says that trustees must make provision for maintenance to their building and not just budget for the general day to day and running expenses.

There should be an allowance in the budget for a purpose-bound reserve fund to be built up for capital expenditure items and the trustees must stipulate what this surplus is set aside for by means of a maintenance plan or schedule for the next three to 10 years.

“The benefit of having a reserve fund is that the body corporate can avoid having to raise a substantial special levy in the future and there will be no maintenance backlog. This is a healthy position for any sectional title scheme, because any maintenance needed to the building should be done as soon as it is needed, and not left until the building starts to look rundown or breakages occur,” he says.

“IHFM usually suggests that the trustees work out a short term plan for the current year, then also factor in the next three to five years as well as a 10 year plan. Then they must project what will need to be done in each year and budget for it. It’s better for sectional title schemes to be proactive in raising the right funds than to wait until maintenance or repairs are necessary and reactively try to raise the money,” says Bauer.

“All income in the scheme is usually broken down into capital expenditure and operating expenditure. If the reserves are determined beforehand, the rand amount can be broken into sections to be used, for example, the roof, the plumbing, electric fencing.

“The trustees should allocate in which years improvements will need to be made to the communal infrastructure such as satellite dishes or modernising electronic equipment. In student accommodation, for instance, where wi-fi connectivity is a necessity for the occupants, some buildings might have to upgrade each unit to have a decent wi-fi connection or where communal satellite dishes have been installed and an extra service such as PVR is added, updated dishes or parts might be needed.

“If the trustees have a reserve fund in place or have a contingency plan for this it won’t create problems.”

Bauer warns that sectional title unit owners must check on budgeted items at the AGM, and ask whether long term projections have been made for the maintenance or upgrading of the building. If the trustees have plans in place it is unlikely that there will be surprises of additional levies having to be raised later.

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