This article about sinking fund forecasts in the time of COVID has been written by Leary & Partners.
Pundits agree, the Queensland government’s initiative to allow unit owners temporary sinking fund levy relief creates more problems than it solves. It is possible however for unit owners to manage contributions to sinking funds more effectively, and in some cases reduce the contributions – often substantially.
Information is power and in times of great uncertainty, good quality information is essential. It doesn’t make a lot of sense for bodies corporate to postpone obtaining sinking fund forecasts, or updates to existing forecasts, during this pandemic.
It is undoubtedly true that some lot owners are experiencing financial hardship right now. However, burying their heads in the sand will not make the problem disappear. It makes far better sense to re-examine sinking fund parameters to see if the changed economic circumstances have a corresponding flow-on effect on sinking fund contributions.
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- For example, inflation in the construction industry has reduced substantially in recent times. If a forecast was produced a few years ago, annual inflation was probably calculated at about five times the current rate. It’s not prudent to assume that today’s level of inflation will continue into the distant future. However, a low rate of inflation is likely to be here for some time. A corresponding recalculation based on this new information is appropriate.
- The same is true for bank interest rates. A professionally prepared forecast will take into account interest earned on estimated bank balances and taxes paid on that interest. A forecast prepared a few years ago will probably include an interest rate that is two or three times what is achievable today.
A new forecast that takes into account the current rate of inflation and present-day bank interest rates will likely result in lower contributions.
Internal and external painting are typically among the largest expense items in any sinking fund forecast. The timing for repainting is frequently subjective. I am not suggesting that repainting a surface which has paint severely degraded and peeling off over large sections can be deferred for an extended period. However, for many surface treatments, an intervening clean down will suffice. If this is the case for your particular property, pushing the painting out for a couple of years may reduce the contributions significantly.
There is another frequently overlooked fact about leaving forecasts unreviewed for an extended time. Sinking fund forecasts are based on estimates. Estimates are frequently conservative because of the uncertainty of predicting well into the future. We often see forecasts that have been prepared by other service providers that are over-funded. This happens because the report writer took an overly pessimistic view regarding the timing and frequency of large cost items such as external painting. Paint finishes generally last longer today than they did several years ago. When levies are calculated to accumulate funds for a large expense item which is not required until several years past the forecast date, excess money accrues in the bank. All it takes to reduce unnecessary contributions is to recalculate the forecast with more accurate information.
The current change in circumstances may provide your body corporate with an opportunity to reduce their sinking fund contributions. I strongly recommend they approach a respected quantity surveying firm with extensive sinking fund experience to prepare or update their sinking fund forecast.
David Leary Managing Director Leary & Partners E: enquiries@leary.com.au
This post appears in Strata News #390.
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