Solving the sectional title maintenance funding challenge

National property group Trafalgar has just launched a new financial service to assist the many sectional title schemes that are having trouble meeting the maintenance plan and reserve fund provisions of the new Sectional Title Schemes Management Act (STSMA).

Regulation 22 of this legislation, which only came into effect a year ago, provides for every sectional title (ST) scheme to have a detailed written maintenance plan that lists all major items or systems on the common property that are expected to require maintenance, repair or replacement over the next 10 years, and maps out when these actions are likely to be necessary as well as what they are likely to cost.

Meanwhile Regulation 2 of the STSMA provides for this 10-year plan to be funded through the establishment and management of a substantial “reserve fund”, and also stipulates the minimum amounts that owners must contribute to this fund each year until it is equal to 100% of the total annual levy income, which is now called the “administration fund”.

The trustees must report back on the implementation of the maintenance plan and the use of the reserve fund at every AGM.

“The laudable aim of these Regulations,” says Trafalgar MD Andrew Schaefer, “is firstly to promote better maintenance planning and more consistent implementation in sectional title schemes, and secondly to eliminate the need for the hated ‘special levies’ that have been the usual recourse of schemes faced with unexpected expenses. And they have of course presented no problems for owners in schemes that already had a substantial reserve fund.

“But the fact is that the majority of schemes did not have a reserve fund prior to the introduction of the new legislation, and that most sectional title owners are now being asked to pay considerably higher levies to get their schemes’ reserve funds established and up to the required level.”

Regulation 2 says, he notes, that at the start of any new financial year, the reserve fund must be equal to a minimum of 25% of the scheme’s administration fund, and that if it is not, the owners in the scheme must add at least 15% to their levies for the next year to be diverted to the reserve fund. What is more, this increase comes on top of any ordinary annual levy increase required to cover the rising costs of running the scheme.

“Alternatively, Regulation 22 does allow for the reserve fund to be quantified based on the annualised maintenance costs reflected in the 10-year maintenance plan. But even then, the additional contributions required to address both current (and sometimes critical) outstanding maintenance as well as the future items contained in the plan are simply unaffordable for many sectional title owners.

“This is creating a serious and mounting problem for many bodies corporate, in that they simply don’t have the money to execute their maintenance plans, and it is in order to provide them with a solution that Trafalgar Financial Services has now launched its Maintenance Finance Solution (MFS) offering.”

Schaefer says it is widely accepted, and confirmed by relevant professionals globally that “prevention is better than cure” when it comes to maintenance, and that professional maintenance work done according to a plan is far more cost-effective that piecemeal work done on an ad-hoc basis or in response to an emergency.  

“And what MFS does, essentially, is to utilise the savings that are gained by attending to maintenance in a timeous and professional manner to ‘pay’ for interest and finance charges, engineering and project management costs, while also enabling a customisation of reserve fund increases and associated payments.”

Major benefits of the MFS offering include the following:

• A professional maintenance plan is drawn up for the scheme and updated indefinitely going forward;

• Regular maintenance is done as directed by this plan, and managed by professionals, ensuring both restoration and enhancement of property value;

• Contributions to the reserve fund can be tailored to owners’ budgets and circumstances without losing the cost-savings inherent in accelerated and professionally-managed maintenance;

• It allows for effective forward planning and anticipation of future costs;

• It is fully compliant with the new Community Schemes Ombud Service regulations;

• It negates the need for future special levies

• It improves the lifestyle and financial position of all owners in the scheme.

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