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Specialist loans the answer to unexpected sectional title expenses

The recent announcement by the City of Johannesburg that it intends charging retrospective security deposits for electricity and water supplies equating to about two months’ usage per meter has once again highlighted the issue of how sectional title schemes are supposed to deal with sudden large demands on their financial resources.
 
“In this instance, we foresee that many sectional title schemes will have problems in trying to collect the backdated deposits from owners and pay them over to the council in time to avoid the disconnection of services,” says Andrew Schaefer, MD of leading national property management company Trafalgar.

“Indeed, there are very few sectional title schemes that have the reserve funds to cope with a really large unexpected expense, and if that expense relates to an urgent repair, for example, or a sudden demand for payment, there may not be time to raise and collect a special levy without incurring penalties or inflation-related cost increases.”
 
What is more, he says, trustees will find that bodies corporate don't usually qualify for bank loans – and that in the event that a commercial bank is willing to provide funding, it will usually require personal sureties from all the trustees.
 
“Fortunately, however, there are a few specialist companies such as Trafalgar Financial Services which do provide loans to sectional title schemes. These can be quickly and simply authorised by a majority trustee vote and signed resolution, with repayments being covered by monthly levy surpluses or a special levy, provided no restrictions have been previously been imposed at a general meeting of the body corporate.
 
“For their own protection and that of their scheme, though, the trustees do need to ensure that their loan provider is registered with both the Financial Services Board and the National Credit Regulator, and is operating within the provisions of the National Credit Act.”
 
Body corporate loans, Schaefer explains, are typically structured as a mezzanine finance loan and are generally in the R100,000 to R500,000 range, repaid over a period of up to three years. “And they have many advantages, not least the fact that they enable urgent projects to go ahead immediately and the sectional title scheme to achieve instant restoration of value.”
 
This type of loan financing is also preferred by “investor owners” who generally don’t want to see the scheme’s reserves increased too much because of the limitations on where the body corporate is legally able to invest surplus funds, and the associated opportunity costs of that, he says.
 
“The Sectional Titles Act says surplus funds have to be invested in a “risk-free” account – which will currently offer an interest rate of around 5,4%. In addition, there is always the consideration that reserve funds can be allocated to different projects or uses when and if the trustees change. A loan obtained for a specific purpose is thus a better option.”


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