Financial security essential for sectional title schemes

Financial insecurity in sectional title schemes can be caused by various factors and these, once identified, should be dealt with swiftly to avoid problems, says Mandi Hanekom, operations manager of sectional title finance company Propell.

The causes are usually in the budgeting and planning for the scheme, cash flow mismatches (where the levies are not high enough and the bills amount to more than the income), unforeseen repairs to items such as lifts or roof repairs, or levy arrears.

All of the above, says Hanekom, have solutions and if the managing agent or the trustees have contingency plans in place, there is no need for the sectional title scheme to have any financial difficulties.

The different options are to have a reserve fund in place, to raise a special levy or apply for credit.

“Although a reserve fund is useful, there are pros and cons to this,” says Hanekom.

“The owners of the scheme might not agree to paying a higher than necessary levy each month purely to bolster the development’s reserve funds. Having a reserve fund does put the scheme in a strong negotiating position with service providers and the ability to draw funds immediately helps the managing agent or the trustees deal with problems swiftly, but there are risks here of misuse and if an owner sells his unit all the money he has put in is not refunded to him.”

She says raising a special levy is another option when there are large projects to be undertaken but this, too, has its problems.

Collection of the special levy is onerous as many owners either will not have the funds readily available (as in fixed income earners such as pensioners or those struggling financially) or they will be resentful of having to pay a large amount upfront. The benefit of a special levy is that only the correct amount needed is collected from the owners, and there is no surplus paid in unnecessarily.

The last resort is usually to apply for credit, but this solution can often be the best for the sectional title scheme, says Hanekom.

“The downside to this option is that there will be interest and fees charged to the scheme, but this option can also be flexible and put the scheme in a strong negotiating position with the service provider. This option makes a lump sum available and ready to be paid over for the services rendered. This system helps fixed income earners budget for a smaller amount added to their levy each month rather than one large lump sum as in the special levy.

“This is where Propell, as a company that provides financing to bodies corporate who qualify for finance, can step in and help maintain the financial health of a scheme,” says Hanekom. “The two most important criteria that will be checked are the property values and the percentage of non-payers in the scheme. If the checks show that the body corporate does qualify, we offer finance facilities for any eventuality, which are easy to set up, are flexible and only incur costs when they are used. The facilities can remain in place indefinitely and the managing agent is able to do his job properly, which ultimately is to ensure the scheme is run efficiently.”

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