This information page about strata finance and strata loans has been provided by Marcelle Van Der Merwe, Capita Finance Solutions.
Strata finance is a type of unsecured loan available to strata title schemes to fund both scheduled and unexpected capital works or to cover financial obligations such as insurance premiums. So, why would an owners corporation consider accessing strata loans?
This type of finance is generally accessed through specialist lenders who are experienced in this highly regulated area.
Strata loans are simply fixed or variable rate products, without any of the more advanced features found in other types of finance such as redraw facilities.
Strata finance is regarded as a relatively short-term source of funding with terms between 1 and 10 years available to residential strata schemes and 5 years for commercial or mixed property types.
Why would your scheme consider Strata Finance?
Owners corporations and body corporates are required by law to make provisions in their budgets for unexpected expenses but despite their best efforts, capital reserves can sometimes fall short.
When this happens, there are three options for sourcing funds to meet their obligations:
- Delay the expense until the sinking fund has accumulated sufficient capital,
- Raise special levies from owners, or
- Source external funding in the form of Strata Finance.
The benefits of Strata Finance
Strata loans are unsecured, which means they have no effect on existing mortgage arrangements.
The repayment schedule of a strata loan is incorporated into the ongoing expense budget of the strata scheme, spreading what could be a significant cost evenly over time.
A strata loan provides immediate access to funding for time-sensitive repairs or projects that could be considered negligent or irresponsible to hold off on.
How much you can borrow
Lenders have to comply with strict state and federal strata legislation and funding limits and in some cases may only be able to partially fund applications for various reasons.
When this happens, owners may be required to commit their own funds to a project before drawing down on an approved strata finance line.
Lenders will determine how much an Owners Corporation can borrow based on a number of factors. These include:
- the amount of finance being applied for,
- the purpose of the finance,
- the size of the loan relative to the size of the strata scheme and
- the effect that the additional debt is likely to have on the levies of each owner.
The cost of strata finance
Whether unexpected costs are financed through a sinking fund, special levies or strata finance, there is a cost associated with having access to capital. This cost is either through a loss of interest income from funds on deposit or through interest and finance charges for loans raised.
Depending on the terms offered by the credit provider, funding can be on an interest-only basis for up to 12 months or a capital and interest basis for the duration of the loan.
Unsecured funding always carries a premium over secured loans, which is reflected in the relatively high cost of Strata Finance when compared to mortgage lending.
The application process: Applying for a Loan
The parties to a strata loan are the Owners Corporation and the lender, but there are compliance issues to be met on both sides involving a range of parties.
For the sake of expediency, it is accepted practice for the representatives of an Owners Corporation to approach a financial institution for credit approval prior to the AGM or EGM at which the resolution authorising the finance will be passed. This allows the Owners Corporation to have all the relevant facts for consideration including the loan documentation outlining all the lender’s terms.
Loan approvals are generally valid for 90 days from the date that credit approval has been granted. If the funds have not been drawn down within that time, the Owners Corporation may need to confirm that the strata scheme’s situation hasn’t changed. If the funds haven’t been drawn within 12 months of credit approval, the application will become void and a new funding request will need to be submitted.
To avoid unnecessary delays, it’s recommended that no time is lost in securing the following essential documentation prior to applying for or settling the loan.
Documentation relating to the proposed work:
- A copy of the quotation, agreement, contract or invoice for the proposed work to be carried out.
- A signed acknowledgement of the Strata Scheme’s intent to proceed with the proposed work.
- A copy of the minutes from the strata plan’s Annual General Meeting (AGM) or Extraordinary General Meeting (EGM) with details of:
- the resolutions authorising the work to be carried out,
- the amount and the term of the loan,
- the name of the lender and
- the method by which the loan will be repaid.
- Where the amount of the loan will be equal to or greater than AU$1million a copy of the Notice of Resolution executed under common seal and a copy of the insurer’s certificate of currency or other acceptable evidence of building and other insurances, including public liability insurance will need to be made available.
- If the project requires the services of a quantity surveyor or project manager, a copy of the Strata Scheme’s appointment of a suitably qualified person to oversee the capital works being undertaken.
Documentation relating to the strata scheme:
- A copy of the strata roll showing a list of current members.
- An aged debtors list with details of all outstanding levies by owners within the strata scheme.
- Audited financial statements for the strata scheme in the prescribed format for the two previous financial years including details of levies payable.
- Identification of the following parties:
- The Strata Plan executive representatives who are signing the loan documents.
- Individuals who are either authorisers or nominated signatories on the account that appear on a signature nomination form (this includes the strata manager if they are a signatory and the Strata Plan representatives if they authorise the signatory nomination form).
Strata finance comes with certain ongoing responsibilities such as:
- If the project to be financed requires the services of a quantity surveyor or project manager, at each drawdown of funds the lender will need to be provided with a report from the quantity surveyor or project manager as to the cost to complete the capital works.
- The continued management of the strata scheme by a professional, accredited strata manager.
- Providing the lender with copies of annual financial statements as soon as they’re available, together with current aged levy debtors reports.
- If the loan isn’t subject to the NCCP the loan may be subject to an annual review by the lender.
Strata finance isn’t necessarily the right course of action for every strata scheme or set of circumstances, but in many cases, it can offer immediate and long-term benefits that more than justify the cost.
Marcelle Van Der Merwe
Capita Finance Solutions
M: 0410 311 889
Looking for more general information on strata, take a look at our page: What is Strata?
Visit Strata Topics by State.