VIC: Q&A Surviving a Cash Flow Crisis [Step-By-Step]

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This article discussing how an owners corporation can plan for and survive a cash flow crisis has been provided by Colin Young and Joel Chamberlain, Horizon Strata Management Group.

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• QUESTION: I find that often people who are short of funds join the owners corporations committee for the sole purpose of stopping or delaying maintenance. Is there a way to deal with this tactic?
• Article: How Can An Owners Corporation Survive a Cash Flow Crisis? [Step-By-Step]

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Question: I find that often people who are short of funds join the owners corporations committee for the sole purpose of stopping or delaying maintenance. Is there a way to deal with this tactic?

One issue I see is often people who are short of funds join the owners corporations committee for the sole purpose of stopping or delaying maintenance. One tactic they use is aggression to try and dismiss or shut down discussions of maintenance.

The other tactic is to get endless quotes over a prolonged period of time.

A third tactic is endless discussion on the quotes & what is necessary.

A final tactic is to try and bully the committee into not increasing the owners corporations fees thus the owners corporations has little money for maintenance.

You have to be brutal with some of these committees. One approach is to get an engineers report on the building outlining all the faults & then go to the consumer affairs website and download the official complaint form. If that doesn’t work, take them to the administrative appeals tribunal and get an order to complete the works.

I think there needs to be a reform. All owners corporations should have a sinking fund and a maintenance plan. A lot of buildings are deteriorating quite badly.

Answer: Everyone has a different agenda or financial position. Sometimes, unfortunately, that can lead to a negative approach to repairs, maintenance or increasing fees.

Good points. Everyone has a different agenda or financial position. Sometimes, unfortunately, that can lead to a negative approach to repairs, maintenance or increasing fees.

The reality is, costs to maintain buildings, improve or even just sustain are always increasing. In some cases, there are improvements with technology or increased efficiencies, but most of the time, it still results in rising costs.

On a primary level, an Owners Corporation has a duty to repair and maintain common property (Sec 46 & 47). When a Committee looks to comply with this duty, they must always be mindful of Section 117 of the Act. This sets out that a member of a Committee or Sub-Committee must act honestly and in good faith, exercise due care and diligence, and ensure they do not make improper use of their position to gain an advantage or benefit for themselves.

A fundamental issue with why a Committee or members can be reluctant to spend money is there might be limited justification or evidence to support the proposed expense. Often, when preparing budgets, very little time is spent on proper analysis of prior expenses, contracts, projected costs and allowing an appropriate surplus for unforeseen repairs and maintenance. This can translate into a budget that is difficult to justify, resulting in members reluctance to adopt it.

I agree with you, there needs to be a legislative move to obligate all Owners Corporations to undertake a Maintenance Plan (regardless of size). This should then extend to the implementation of the plan and raising appropriate funds. Even under current legislation, there is no obligation for a Prescribed Owners Corporation to implement a Maintenance Plan, so in theory, what is the point of obtaining one if it isn’t implemented?

Some owners don’t realise that a deteriorating or underfunded Owners Corporation is actually a turn off for prospective purchasers. As the industry matures and people become more informed, they are now looking at fees, funds and how the buildings are being managed. This can weigh heavily on their decision to purchase or look elsewhere.

We have a long way to go in this industry to get to a point where owners can be confident that their assets are going to be maintained correctly, without the need to fight with those who don’t believe in a pro-active approach.

Joel Chamberlain
E: [email protected]

This post appears in Strata News #375.

How Can An Owners Corporation Survive a Cash Flow Crisis? [Step-By-Step]

In uncertain economic times, Owners Corporations can be financially vulnerable. Imagine a time when a lot of people are losing their jobs. The current climate in Australia is a perfect example of how rapidly a global incident can affect local business within a matter of months.

In these circumstances, affected people will have less disposable income and thus prioritise how they spend it. Owners Corporation fees may fall a long way below food, mortgage payments, utilities, etc.

Arrears have always been a focus for competent Managers but in circumstances described above, normal procedures may not stop the Owners Corporation experiencing cash flow problems. Collection of arrears can be a lengthy process taking years, in some circumstances, resulting in a severe shortfall of available funds. If expenditure remains the same or increases, it has to be carried by the remaining owners.

In this article I will propose some steps which can help your Owners Corporation plan for and survive a cash flow crisis.

Does your owners corporation have a plan to cope with a crisis event?

Prescribed Owners Corporations can be similar to running a business. They have clients and suppliers, cash flow management challenges, etc plus numerous legislative rules to follow above those in the Owners Corporation Act. These might include Taxation obligations for GST, PAYG or requirement to lodge an Annual Income Tax Return. The point here is that successful businesses usually have an adequately prepared business plan identifying potential weaknesses or threats to their business.

An Owners Corporation ideally would be the same, with the Committee having formulated in their plan a contingency for a crisis event. That plan would typically include things like building an Administrative Fund reserve and having a proposed schedule of services which can be trimmed or cut altogether.

The first thing to recognise is that in most circumstances, difficult economic times will not last forever. If there is no plan for such an event as outlined above, you have to ensure safe operation of the building is the top priority.

It is always helpful to identify those falling into arrears for the first time. They could have lost their job or have unexpected short term financial problems. In addition to simply continuing to issue notices, communication can be the key.

A polite conversation will open up communication which can lead to unpaid fees being discussed in a respectful manner allowing a more likely collection arrangement being made. A heavy-handed approach in stressful times can result in communication shutdown with the only solution being a drawn-out collection period. Your Owners Corporation Manager must have this technique in their protocols and Committees should be prepared to listen.

In addressing any shortfall, it is important to realise that it is risky to move funds from one Owners Corporation to another if one has funds, and the other not. It must be understood that each Owners Corporation is a separate legal entity and that under the Owners Corporation Act 2006 there is no power for one Owners Corporation to loan money to another and doing so could result in a breach of the Act.

So, what do you do if your Owners Corporation is facing a financial dilemma?

Step-by-step: how help your Owners Corporation plan for and survive a cash flow crisis

1. Ensure the preparation of a good financial plan which is flexible and able to identify the potential shortfall as well as determine areas of top priority to keep funded. This plan then has to be monitored on a regular basis to enable changes as circumstances unfold.
2. Consider a special levy. This is possible but, of course, those Owners in arrears won’t be able to meet their obligation, so the remaining financial owners will carry the burden. This is not really fair and is probably a last resort.
3. Examine carefully the budgeted expenditure components and identify where cuts are possible. Most basic building operations require power and/or gas so those are a priority. Having said that, provided safety is not compromised, cutting some services or introducing power saving protocols can help if things are precarious. This might include introducing power saving light globes all the way through to closing one of several lifts.
4. Consider deferral of non-essential items.
5. If a Maintenance Plan is in place and the Owners Corporation is raising fees to meet the plan, consider deferring Maintenance Fund contributions for a short period and increasing Administration Fund contributions to meet the short fall in operating expenditure. You should then form a catch-up plan for the Maintenance Fund going forward. This might mean that the overall fees paid by each lot owner remain the same, however, they are directed towards the Administration Fund to meet essential expenditure. Some Maintenance Plans have been prepared years ago and may have been built on assumptions which are now inaccurate. Perhaps getting a plan reviewed can result in a lower accumulation and thus resulting in the opportunity to defer contributions temporarily.

   Under the Act you have an obligation to fund an adopted Maintenance Plan to meet long term maintenance items as and when they are anticipated. Both the Administration Fund and the Maintenance Fund are associated with the same Owners Corporation, so you do not have the same problem as loaning funds from one entity to another. The correct approval process must be followed by the Committee or Owners Corporation to implement this type of solution.

6. External loans may be available to the Owners Corporation to fund a particular expenditure item, thus saving that money for operational expenditure. Organisations such as StrataLoans and Macquarie Bank have facilities available.

Finally, I stress that it is important Owners Corporations do not panic when confronted with difficult financial situations. Good financial planning and a vision to meet difficult circumstances should result in a sustainable and satisfactory outcome.

This post appears in Strata News #334.

Colin Young
Chartered Account
Horizon Strata Management Group
E: [email protected]
P: 03 9687 7788

Have a question about how your owners corporation can plan for and survive a cash flow crisis or something to add to the article? Leave a comment below.

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