Keeping the stash in the cupboard

Clause 76(4) of the NSW Strata Schemes Management Act (1996) is the relevant reference, where it states:

“(4) If the owners corporation is subsequently faced with other expenses it cannot at once meet from either fund, it must levy on each owner a contribution to the administrative fund, determined at a general meeting of the owners corporation, in order to meet the expenses.”

@tracer said:

Thanks Whale & kiwipaul for your replies. The difficulty here is the EC control over 50% of the building through either passive or non resident owners..

 

I assume you mean the EC control the OC through passive or non resident owners, because the EC CANNOT raise a Special Levy only the OC can do that.

YOU are legally allowed to access the owners register I would suggest that you send all of these passive voters a letter explaining that the EC is intending to raise an unnecessary special levy of $xxx when their is $xxx in the sinking fund and so would they be prepared to vote against this motion or give you their proxy to vote against this levy (include a proxy form suitably filled in with you as proxy that just requires them to sign and return)

Don’t inform the EC that you have this proxy until the meeting (you might have to give to the SM 24 hours before for legal reasons) because the newest dated proxy is the one that counts.

“The sinking fund is not an emergency fund – it’s a repair and maintenance fund.”

Agreed — but the need for repairs can emerge literally overnight, and liquidity can be an asset in such a situation.  I am the recent Chairman and current Treasurer of a scheme with a healthy sinking fund on which we have just had to draw for some unexpected sewerage works.  We know of a pending need for retaining wall repairs and also have a roof membrane on borrowed time.  The statutory review is due this year, and I would rather see a positive conclusion presented to the Owners.

And if there are emergencies, our friends at Lannocks will step up with loans which they say make more economic sense than sinking funds in the first place.

Nothing personal, but sn’t there something of a competing interest here?  Loans have to be repaid and, if the EC have sought to make heroes of themselves by keeping levies down to a minimum, there could be a nasty shock at the next AGM as the proverbial chickens come home to roost.

It makes all sorts of sense to spend your sinking fund – that’s what it’s there for.

It also makes sense to be sure that you are covered for reasonably forseeable expenditure even if a precise time cannot be put to it.

@excathedra said:

Agreed — but the need for repairs can emerge literally overnight, and liquidity can be an asset in such a situation.  

True, and I really understand and accept where you’re coming from, but how much liquidity do you really need?  

I was generally referring to buildings where they cover themselves for every possible eventuality and even then don’t spend the money in case something else comes up.  Your situation is quite different where you have a clear idea of what you are going to need to fix in the near future. 

Regarding issues like your emergency sewage works, all you need is enough money to get the work started and a line of credit with a lender to pay for it when it’s finished.  It would be well worth talking to someone like Lannocks or Macquarie Bank – both of whom offer strata loans – to find out if that really would be any more expensive than keeping the ‘rainy day’ money in the bank.

Loans have to be repaid and, if the EC have sought to make heroes of themselves by keeping levies down to a minimum, there could be a nasty shock at the next AGM as the proverbial chickens come home to roost.

The simple answer to that is that there should be no shocks or surprises.  You give owners the choice between putting the money aside or finding it when it’s needed.  If they go for the latter, you explain the costs involved and then put all the agreements in place so you can trigger the loan when required. Note that neither of these scenarios require special levies.

It … makes sense to be sure that you are covered for reasonably forseeable expenditure even if a precise time cannot be put to it.

Define ‘reasonably foreseeable’. I don’t disagree with your natural caution but I think there’s a balance.  In the unlikely event of anyone ever putting me in charge of the finances of a strata plan, I would have part of the sinking fund for work we KNEW we needed, a small emergency fund for things we didn’t know might occur and a line of credit for unexpected major contingencies.

Like the man said, there are things we know, things we know we don’t know and things we don’t know we don’t know.  For the latter two categories of strata repairs, I’d be tempted to spend money on a parachute rather than a safety net.

@excathedra said:

To Jimmy:  I note your arguments, which have merit.  I’m not a finance expert, but hope to bounce the issues off one or two who do have relevant expertise but don’t make their incomes from lending money.  As before, nothing personal!

No personal offence taken – it’s a tricky area and I’m not an accountant.  

Lannocks have been doing great work in Far North Queensland, helping strata owners hit by floods who were uninsured (because of previous floods).  However, I know they are keen to present themselves as a third financial option – alongside prepaid levies and special (emergency) levies – and I think their value compared to special levies is quite clear.

The other issue is less obvious without sitting down and punching in their numbers, including interest rates, and comparing the pre-pay with the post-pay columns.  

Hopefully Paul Morton of Lannocks will come on board and add his inside knowledge to the discussion.

@dech said:
The first result is a very large sinking fund – nothing predicted has yet occurred about five years into it, the other outcome has been extravagant spending on unnecessary changes which has no doubt been partly owing to the fact that we have so much ready cash.

The sol is simple submit a motion to the next AGM that the sinking fund contribution be suspended until the sinking fund balance reduces to a more reasonable figure. Just requires a simple majority to pass this motion.

Also any spending which is not a simple repair or maintenance would be considered an improvement requiring a Special Resolution by the OC to authorize (75% in favor).

Community living requires a fairness test.  Seems fairer that people who live in the building pay for the use and wear and tear of common property, spread over time.  Loans and special levies are in the mix for raising funds, but don’t they kick the can further down the road?  New owners buy and then are faced with unanticipated special levies or loans, while the people who sold their unit after thirty years of low levies, selling their apartment at a premium, and then move on to the next under funded strata plan in a hope to dodge the responsibility of a little lifting over a long period.  Over 85 % of strata plans in Australia are currently under funded, hence s75A of the SSM Act.  I prefer David Bannerman’s interpretation of this section of the act.  Striking levies must be done taking into account the Sinking Fund Plan, in good faith.  This section was added to the act, because all of the buildings constructed in the 60s and 70s are at a precipice of decay, and common property works will be a major feature of the next building boom.  Get prepared OCs and start saving I say.