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Hi Strata Answers,
Thank you for your contribution to this forum topic. Whilst I agree with your suggestion re- borrowing for a term of 7 or 10 years to be more equitable… this argument was put at our AGM (the issues in our complex are both consequences of fire orders AND paying for legacy defects) and the argument was defeated.
Through this experience, I’ve found that issues of equity (though a nice ideal), don’t factor at all in these situations. My observations were that decisions were made and votes were cast purely on the basis of individual owner’s economic concerns. In this instance, the owners in my complex, faced with very large costs for legacy defects preferred a short term loan to avoid the downsides of a longer term legacy loan.
Apologies to Strata Answers, but as I discovered, your suggestion is too idealistic. Perhaps it might work in an apartment complex with a majority of owners who don’t have access to liquid funds, but even in this situation, an agreement for a longer term loan would be based on each owner’s own financial situation, it is unlikely to be based on a decision to spread the cost of paying off a legacy debt equitably.
In strata, owner’s votes are probably 99% based on how decisions will directly affect them economically.
I live in a large apartment complex in NSW and we had this exact issue last year – a large bill for mandatory defects. Our complex has a wide socio-economic/socio-demographic profile; owner/investors, mortgage holders, outright owners, families, retirees, professionals, new home buyers…
When financing options were discussed, the loan plus levies idea was floated. In our instance, even if the regulations weren’t a barrier, there would be practical issues. Our works will take place over a year or years. We assumed that owners who paid outright would want to have the works to their apartments completed first which for our complex, isn’t a practical possibility.
Our complex ended up going with a loan, but agreeing on loan terms was vexed; the duration of the loan made a massive difference to the quarterly repayment schedule, but a longer term and lower repayments meant a big difference in the total amount of interest paid. Both of these affect those needing/wanting to sell, not to mention selling in the midst of construction works.
We even considered whether we could have two different loan terms for the cashed-up and non-cashed-up owners, but met the same obstacles.
Loan terms were eventually agreed but it wasn’t unanimous, that’s a risk of buying into a strata plan. The financial effects are very real and there have been a few sales, but that’s the way the complex crumbles. Or doesn’t.