This article about body corporate cost-cutting during COVID-19 has been supplied by Todd Garsden, Mahoneys.
Body corporate levies are one of the first items of expenditure owners don’t pay in tough times.
Committees need to be aware of this and the consequences of:
- reducing or delaying budgets and the associated levies; and
- using the sinking fund for the body corporate’s upcoming expenditure in lieu of the unpaid levies.
The body corporate must adopt two budgets each year, for:
- recurrent spending, being the administrative fund; and
- non-recurrent spending designed to accumulate for the next 9 years of major expenditure, being the sinking fund (for example, repainting of the scheme).
The levies are then based on these budgets. The body corporate cannot budget for miscellaneous or contingency amounts.
Often times there is no “fat” to trim from the “meat” of the expenses in the administrative fund.
If properly budgeted for, the administrative fund balance should be close to zero at the end of the financial year. Accordingly, unless the actual costs and expenses to be incurred by the body corporate are reduced, the administrative fund budget should not be reduced. Otherwise, all that will happen is a:
- cash flow problem will be created; and
- deficit will be created that must then be recovered from owners through a loan or special levy.
Reducing the sinking fund will be less of a cash flow problem as the money here is earmarked for future major projects based on the sinking fund forecast.
Accordingly, in the absence of a reduction in anticipated capital expenses, the body corporate could consider reducing sinking fund contributions but needs to consider any reduction on the basis that it is only temporary. The reduced funds still must be levied at some point to meet the anticipated expenditure when that expenditure becomes due.
However, committees need to appreciate that as a result of any reduction to the sinking fund without proper planning:
- the amount budgeted for must still be “reasonable” for the year’s spending and be an “appropriate proportional share” for future year’s spending, otherwise the reduction would be unlawful; and
- when it comes time to deal with the major project (assuming the sinking fund forecast is accurate), the body corporate will find it now does not have sufficient funds to meet the expenditure and will be required to then raise the funds from the owners.
The problem with this is that if times are still just as tough as they are now, and the required works are urgent and must be carried out, the body corporate is then in a situation where it is asking owners to approve a loan or to contribute for unplanned, urgent and significant contributions – a much worse situation than managing the existing levies that have been approved and spreading the burden across many levy periods.
Reallocation of forecasting
Alternatively, the body corporate could look at reallocating the planned expenditure. To do so, the body corporate should be able to show that major projects already budgeted for:
- can be deferred (for example, the repainting of the scheme can be carried out in 2026 instead of 2025) while the scheme remains in good condition; or
- reduce the forecasted cost of the project (for example, the pool refurbishment will only cost $100,000 instead of the forecasted $150,000).
The body corporate’s quantity surveyor who prepared the sinking fund forecast may be able to help in this regard and provide calculations that represent a fair redistribution of costs.
Reallocating between the funds
Bodies corporate cannot use the sinking fund as a “savings account” to meet administrative fund expenses.
Not only is this unlawful, but it will create a deficit in the sinking fund that still needs to be accounted for.
Rather than levying owners for funds, the body corporate could consider getting a loan. This may provide some short term relief to lot owners but the committee also needs to consider that a loan will:
- only delay contributions required from owners – that must eventually be repaid; and
- increase the ultimate amount of funds required from owners when the interest component is accounted for.
Accordingly, a loan may provide a short term cash flow solution but committees should consider it in light of the long term effect.
Any loan also requires approval at general meeting which will also increase the administrative costs to approve a loan.
For total borrowing under $250 for each lot, an ordinary resolution is required. However, if the body corporate will have a total amount borrowed of more than $250 for each lot:
- a special resolution is required if the body corporate is regulated by the Accommodation Module; and
- a resolution without dissent is required if the body corporate is regulated by the Standard Module.
Although reducing or delaying levies appears to be an attractive option to help owners at the moment, the reality is that:
- any adjustments must be carefully considered and justified by the committee; and
- considered in light of the costs to implement the change (being the fees to call and hold a further general meeting) and the long term effects.
The ways in which reductions of levies could be achieved include:
- an actual reduction in expenses from the administrative fund budget for the financial year (for example lower electricity costs);
- an actual reduction in expenses from the sinking fund budget for the financial year;
- delaying of major projects;
- reductions in the estimated cost of major projects;
- borrowing – but on the basis the funds will still be recovered in future years in addition to interest; or
- a temporary reduction in the sinking fund levies – but on the basis the funds will still be recovered in future years. This is a riskier option that would not necessarily be recommended.
This post appears in Strata News #343.
Have a question about body corporate cost-cutting during COVID-19 or something to add to the article? Leave a comment below.
- QLD: Q&A Major Works Essential During COVID-19?
- QLD: Strata levies and COVID-19
- NAT: Peak Strata Body Calls For Lot Owners To Keep Up Strata Property Maintenance During COVID-19
This article has been republished with permission from the author and first appeared on the Mahoneys website.
Looking for strata information concerning your state? For state-specific strata information, take a look here.