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We are looking at buying a strata flat in NSW, and have just got the strata report back.
The balance of the administrative fund is -$4500. The sinking fund seems healthy at $42,000. The building has 18 flats.
Is this negative administrative fund balance something we should be concerned about?
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Negatives are to be avoided, however they are hardly uncommon in Admin Funds and always look better with a strong Sinking Fund balance like this.
You really need to understand why the balance is negative. Did the Strata Plan have some extraordinary expenditure that has caused the issue? Were the budget recommendations accepted at the last few AGMs? Are other owners behind with their levy payments?
You and your solicitor need to look at the data extracted by your Strata Inspector to see how the situation has come about. All the information should have been extracted during the strata search. If not ask the Strata Inspector for more detail, they should understand this stuff inside out.
Dragonfly – it depends upon the reason/s for the over expenditure and whether that’s a “one off”, due to a number of matters, or is symptomatic of regular under estimations of expenditure possibly due to Proprietors’ reluctance to match their collective Levy Contributions to a properly calculated budget.
There are two (2) reports that are generally called “Strata Reports”, one (under S108 of the Act) contains details of the Plan’s insurance policy, the amount of the Levy Contributions applicable to the Lot, any amounts outstanding by the current Proprietor, and the current balance of the Admin. and Sinking Funds. The second report (under S109 of the Act) contains all of the above plus details of all expenditure for the past two (2) years, the Plan’s 10 year expense plan, details of any special levies past or planned, minutes of past General Meetings or at least a summary of significant items such as disputes, By-Laws, and any planned building works (that may or may not have been budgeted), and more….
If it’s the S108 Report that you have, then ask for one under S109, and if you have the latter already then you need to read it more carefully or ask the person who provided it for some explanations; there may be a perfectly reasonable one, but right now you don’t know what that is.
From my S108 search of my strata building earlier this week:
Admin Fund $55,000
Sinking Fund -$4,500
We have 4 months of our financial year left. I am ploughing through records trying to understand.
You won’t find a definitive explanation unless you look through the individual transactions in the sinking fund, or if you ask the Strata Manager.
Circumstances such as you describe are not ideal but are nonetheless quite common where one explanation, that may or may not be the one that’s applicable to your Plan, is where an expense arises that should legitimately be paid from the sinking fund, but due to an insufficient balance there it is paid from the administrative fund, but still booked (recorded) against the sinking fund thereby producing a negative balance.
The Strata Schemes Management Act explicitly describes what types of expenses must be paid from each fund, and in the circumstance that I’ve described here, the Owners Corporation has three (3) months to decide upon a means to fully reimburse its sinking fund, such as by raising a special levy or by increasing contributions to the administrative fund so as to produce a surplus that’s equal to the amount to be reimbursed.
Thank you.
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