Occasionally, an Owners Corporation will find itself in a position where it needs the finances to repair the damage or pay an insurance premium, but they do not have enough money to do so. In such situations, there are several actions and options available to the Owners Corporation. Listed below are some suggested solutions.
The expenses associated with maintaining and keeping a building running quickly add up and eat into your strata funds, leaving little to be available if an unexpected event occurs. For this reason, it is important to re-evaluate your current expenses and determine if there are ways in which you could cut down on costs.
Solutions, such as investing in more energy-efficient lighting solutions by using energy-saving bulbs in communal areas, or sensor lights in hallways, will dramatically slice your energy bills. Perhaps, you may be able to negotiate with another building and share cleaning, gardening or security services with a nearby complex or building. Generally speaking, it will be difficult for an Owners Corporation to find sufficient additional funding through reduction to cover a large unexpected expense.
Dip into your capital works fund
A crucial lifesaver is a capital works fund (previously known as the sinking fund), designed for non-recurring capital expenditure items of the Owners Corporation. It must also maintain a reserve of funds for similar future expenses, and unforeseen circumstances where the Owners Corporation doesn’t have enough money to cover the costs. If your Owners Corporation already has a capital works fund, this is the time to use it. If not, it’s time to get a capital works to forecast which outlines the expected work for the Owners Corporation for the next 10 years.
Strata levy is a regular financial contribution made by lot owners that go towards funding the operations and maintenance of their strata property. Levies go towards two funds: the administration fund and the capital works fund. In the event where the expense item is not immediately payable, then the Owners Corporation can consider raising its quarterly levies to ensure it has adequate funds to pay for these upcoming expenses when payment is due. Such an increase does not have to be permanent – the owners may decide to increase levies for three quarters for example.
Introduce special levies
A special levy is another common alternative to create cash flow for an emergency project or one that wasn’t included in the scheme’s budget. A Special Levy can only be determined at a General Meeting by ordinary resolution. Not only can it determine the amount, it can also outline the manner in which the special levy will be raised e.g. lump sum, monthly instalments. Like normal strata levies, the special levies payable by each individual lot owner will be determined by their unit entitlement.
Apply for a strata loan
The last resort is taking out a strata loan. A strata loan is a loan designed specifically for an Owners Corporation, enabling them to access immediate funds to complete work such as major repairs or large capital works. It can also be used to fund a building’s insurance premium and professional services such as litigation and consultancy. Just like any loan, a strata loan attracts interest, and the Owners Corporation should carefully consider the cost of applying for a loan versus raising funds using other means discussed above.
All of these options are a starting point to resolve inadequate Owners Corporation funds in an unexpected event. If you need further assistance or advice, contact More Than Strata today.