Question: When developers are selling off the plan, what is their responsibility to ensure they put forward real numbers for strata levies?
When developers are selling off the plan, what is their responsibility to ensure they put forward real numbers for strata levies? We often hear that, to generate sales, developers try to minimise strata levies. Once the building is occupied, funds are below what is required to properly maintain the building and this causes additional need to raise funds to manage the building. This also hugely impacts warranties.
Answer: If the CWFP is undertaken by a developer, these may be conservative and lend towards lower levies, hence a more marketable sale, particularly if done off the plan prior to completion.
In the state of NSW, a developer of a new scheme must complete a Capital Works Fund Plan (CWFP). This helps the Strata Manager set levies and also what is called an Initial Maintenance Schedule (IMS). The IMS is a maintenance regime for all assets in the new scheme and how these should be maintained in relation to warranties. Essentially this is the developer saying to the new committee “here is everything I put into the building and here is how you maintain it,” so this report if done correctly is meant to take care of the warranty scenario.
At the commencement of a new scheme, essentially the developer still owns most of the lots and hence forms the Strata Committee responsible for maintaining the Owners Corporation. If completed by an independent professional, the CWFP will reflect real numbers and expenses set for the future. If however undertaken by a developer, these may be more conservative and lend towards lower levies, hence a more marketable sale, particularly if done off the plan prior to completion. It is then the responsibility of the new owners forming a proper strata committee to investigate what is currently being budgeted for and if necessary, get another CWFP done by an independent professional to ensure that maintenance has been budgeted for appropriately.
The good news is that at the birth of a scheme, minimal maintenance is required for several years as all materials, assets etc are new, giving the owners corporation the time to save money for expenses down the track. There should not often be a scenario in which new owners have to raise significant special levies immediately for maintenance works unbudgeted for. There is also a (warranty scheme in play that requires the developer to rectify any issues that occur during the first few years. Please Note, there is a requirement for the OC to enlist the services of an independent expert within 2 years of forming the OC to inspect the building and ensure that any defects that are the developer’s responsibility are taken care of before the developer is entitled to receive their 2% government building bond back.
This post appears in Strata News #565.
Dakota Panetta Solutions in Engineering E: dakotap@solutionsinengineering.com P: 1300 136 036