As a lot owner in a strata scheme, it’s up to you how involved you get in the daily running of the building. Most strata schemes have a committee to represent all residents and owners, so you can join that if you want to be more involved. However, as a member of the Owners Corporation, you have a right to understand the building’s financial position because, ultimately, it affects the value of your investment.
In this article, we’re going to look at why it’s so important to understand the scheme’s financial position and how to determine it. Read on to find out more.
The importance of understanding your financial position
Since we’re looking at the financial position of the entire strata scheme, rather than that of individual lot owners, everything needs to be taken into account. It’s important to understand where the scheme stands financially because it’s the only way to plan for the future.
Firstly, strata levies are usually calculated as a percentage of the building’s property value. So, if you’re not in a financial position to maintain the property correctly, let alone do the necessary upgrades, it’s likely that your property will decrease in value. While this might be great for lot owners looking for cheaper levies, it benefits nobody in the long run because each individual lot ends up being worth less.
Naturally, to keep residents and lot owners happy, the strata scheme needs to be proactive when it comes to property maintenance and upgrades. We’ll get into the details of the different funds held by the Owners Corporation, however, if you don’t have enough money to pay for maintenance and upgrades, it causes a wide range of problems.
So, it is crucial to understand the scheme’s financial position in order to plan for the future while also taking care of the day-to-day running.
Different strata funds
Each strata scheme has at least two funds they manage every day. Let’s look at each of those funds to determine why they are important.
There may be several different names for it, but the main fund looked after by a strata manager is the one used for regular operating expenses. This is the fund that all standard strata levies are paid into. It is used for such things as:
- Regular maintenance
- Energy costs for shared areas
- Waste removal
- And much more
These are classified as ordinary expenses and therefore don’t need any special resolutions or votes on how to spend the money. It is managed by the strata manager, whether that be a committee or an independent strata manager. Of course, proper records need to be kept and made available to lot owners when requested.
Capital works fund
The capital works fund is also known as the ‘sinking fund’. Lot owners pay separate levies into this fund to handle irregular maintenance, property upgrades and all types of repairs or improvements not covered in the general operating expenses. It’s important to note that the capital works fund is used for common area expenses rather than individual lots. The only time that may vary is if the Owners Corporation approves small changes to every apartment, for example, the installation of energy-efficient light globes.
The capital works fund may physically sit in the same bank account as the ordinary funds, but separate records must be maintained to determine how much is available for each type of work.
What about special levies?
Special levies are an additional fee paid by lot owners for out-of-the-ordinary expenses. For special levies to be paid, a special resolution needs to be tabled at a general meeting and voted on by owners.
This could be for repairing roofing after storm damage, increased insurance costs, or other unexpected expenses not allowed for in the capital works fund. A 75% majority vote is needed to implement special levies unless it is for sustainability upgrades such as solar panels, recycling technology or other energy efficiency measures. For these proposals, only a 50% majority is required.
Knowledge is power
The other reason it’s important to understand your building’s financial position is so that you can become more involved in the strata scheme’s direction. Many lot owners are happy to let the committee or strata management team take care of everything, but others have some great ideas and want to get involved.
However, it’s a little difficult to suggest improvements if you have no idea of the financial position. In that respect, it’s like any business. Unless you know how stable things are financially, you can’t really have much input into potential improvements.
So, if you want to be more involved, join the committee and get a more up-close view of how the finances work from month to month. Then, you’ll be able to suggest improvements that are within your budget.
How to determine a scheme’s financial position
At every Annual General Meeting (AGM), finances are always a hot topic. The committee or strata management company will present details of the scheme’s financial position. This is the easiest way to keep abreast of how the finances are going.
Financial reports should be tabled at every AGM, giving all owners the chance to see how each fund is travelling and how they can plan for the future. Carefully look at balance sheets and financial statements to get the full picture.
If you’ve hired a strata management company, you should be provided with excellent financial records. The strata manager can answer any questions you may have during the AGM or other special general meetings.
Need help with financial management?
More Than Strata provides expert strata management services to take the load off your committee. We take care of the financial record keeping, levy management and all other daily operational needs. By hiring a strata management company you don’t lose control, because the Owners Corporation still votes on changes. However, you can remove the daily hassle of administering the scheme with the help of our experts. Contact us today to find out more.