AA - June 2021

Author: STONEWOOD Property Management
16 June 2021

WHAT FINANCE OPTIONS ARE AVAILABLE TO SCHEMES THAT ARE SHORT OF FUNDS?

Managing the finances of a body corporate requires careful attention, both to the budgeting process and the implementation of maintenance projects within the framework of the approved budget.

Budget control is key

One of the most important fiduciary responsibilities of trustees is to manage the budget effectively. Without careful budget planning and control, the scheme may not have sufficient funds for planned or unplanned maintenance. When that happens, the scheme can consider a number of options to obtain the funds, depending on their reason or purpose.

Reasons for insufficient funds

A scheme can find themselves without sufficient funds for one of the following reasons:

Poor historical budgeting or under-budgeting
Unexpected urgent major expenditure
Arrear levies
Prior to October 2016, when the Sectional Titles Schemes Management Act (STSMA) was promulgated, it was common for schemes to budget for the bare minimum in expenses in order to keep levies low. There was minimal planning for high-cost maintenance expenses – such as painting the buildings or replacing old lifts – which usually resulted in the schemes finding themselves without the necessary funds by the time projects were due.

When there is a culture of defaulting levies in a scheme, it prevents the body corporate from performing maintenance. Add to this an insufficient collection policy and the financial situation can quickly spiral out of control.

Financing options

Maintaining major capital items requires a lot of money. Schemes may find themselves unable to attend to critical maintenance or repairs until they have saved enough money but, in the case of an emergency (like a broken-down lift), the trustees may be forced to attend to it and make an alternative arrangement to finance such a project.

The following financing options are available to trustees:

Major capital expenses

Schemes can approach specialist financing companies that provide credit to bodies corporate. This will give the scheme immediate access to the required funds and scheme members will be responsible for repaying their share of the loan. This type if financing usually includes a high interest rate.

Arrear levies

When arrear levies affect the day-to-day functioning of a scheme, it is vital that trustees take immediate action against the defaulters. However, legal proceedings typically take time and will probably not result in immediate access to funds. In this case, the body corporate can approach a specialist levy financing company to provide access to the necessary cash flow. The benefit of levy financing is that only the defaulting owners are penalised with interest and other charges.

Conclusion

It is prudent for bodies corporate to have stringent budgeting process and a strict levy collection policy in order to keep up to date with maintenance obligations as set out by the 10-year plan.

In the unfortunate event that something goes wrong which results in financial distress for the scheme, it up to the trustees to identify the reason for the shortage of funds and to evaluate their options to return to liquidity.

An external financing company offers a quick solution to bring the scheme back on track with its fiduciary obligations.

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