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You are here: Home / Levies / Levies WA / WA: Q&A Why Make a Reserve Fund Compulsory?

WA: Q&A Why Make a Reserve Fund Compulsory?

Published October 16, 2020 By David Chokolich, HFM Asset Management 1 Comment Last Updated October 19, 2020

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This is a Q&A from a WA Lot Owner why make a reserve fund compulsory has been provided by David Chokolich, HFM Asset Management.

Question: I’m questioning why they would introduce a 10 year maintenance plan and make a reserve fund compulsory. There’s no link between the two.

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I’m questioning why they would introduce a 10 year maintenance plan and make a reserve fund compulsory. There’s no link between the two. The new changes do not give any benchmark for how much a strata company should raise as a reserve fund.

Also, when does the 10 year plan have to be in place and do the funds need to be saved into a separate fund?

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Answer: I don’t think you’re going to be able to have one without the other.

I have exactly the same question. I’m not too sure why. Yes, I don’t believe that the new regulations actually stipulate how much you need to keep in there as a minimum. This will be something where, if someone asks to see the records and they see that your reserve fund forecast is showing that you need to spend $250,000 to update your lifts and you’ve got no money, people will be asking questions such as ‘Where are they going to get the money from? Is that going to mean a special collection that they’re going to have to do?’ So that will be a concern.

I don’t think you’re going to be able to have one without the other. It might all take a year or two before it washes through the system. I feel that the people who are purchasing are going to be the ones who are going to be driving this. If you’re looking at two strata schemes next door to each other and they look similar, but one seems to be better managed than the other, then that’s probably what’s going to drive it at the end of the day.

Regarding whether there needs to be a separate account, yes, I believe that there has to be a fund so a fund needs to be created ie. bank account or trust. As I said, my understanding is the regulations don’t stipulate how much money you need to keep in there but I guess in terms of the council of owners, they need to understand how they’re going to be able to get that money or get a loan or look at whatever options there might be to have that money available to them when they require it.

I’ve had people say to me, ‘why should I pay for a fund for a lift to be upgraded in 10 years time if I may not be there?’ but that same person is using the lift every day. So it sort of seems a bit silly, but these are the questions that I’m asked.

So yes, I believe the regulations don’t stipulate and aren’t clear on that. But I think something will happen to someone, and that’ll create precedence in the industry and then people will follow. So no doubt, lawyers will get involved and then everything will get messy after that.

David Chokolich
HFM Asset Management
P: 1300 021 420
E: [email protected]

This post appears in Strata News #416

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Read next:

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Comments

  1. AvatarKaylene Arkcoll says

    October 19, 2020 at 8:36 am

    The disconnect between the 10 year maintenance plan and the compulsory Reserve Fund is something that Leary & Partners, as major providers of 10 year maintenance plans, are being asked about too.

    Based on our experience during the introduction of the equivalent legislation in QLD, NSW and Victoria, we anticipate an incrimental growth of the link between the 10-year maintenance plan and the compulsory Reserve Fund, led initially by property purchasers. Our eastern-state experience suggests the 10 year maintenance plan will rapidly become an influential part of the standard pre-purchase report information.

    It will take longer to reach the point where many lot owners take it for granted that the recommended 10 year maintenance plan contributions are the basis of setting the levies for the compulsory Reserve Fund.

    Our NSW experience suggests that at this point there may be a second legislative push to formally link the 10 year maintenance plan and Reserve Fund contributions. I assume it is easier to sell this more prescriptive regulation when there is a perception that only a minority of ‘non-conforming’ strata companies will be affected.

    The speed at which the link between the 10 year maintenance plan and the compulsory Reserve Fund naturally occurs will be substantially dependent on lot owners’ initial 10 year maintenance plan experience.

    The 10 year maintenance plan is a budget document. It is critical the plan reflects this primary purpose. We are observing a substantial focus on the assessment of the physical common property condition (which is important). We are not seeing the same level of questions about the quality of the cash-flow calculations which translate the forecast maintenance expenses into equitable annual levies.

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