This article discussing strata finance assisting your building’s obligations arising from a cladding audit or other building defects has been provided by Debbie Barker, StrataLoans.
If you are living in a strata titled building you may be aware that the Western Australian Government are in the process of undertaking a state-wide cladding audit of public and private buildings, resulting in:
- 477 private buildings identified as having cladding; and
- The introduction of new applicable building standards for non-combustible external walls for new building work, to prevent the use of combustible cladding in the future.
The combustible cladding audit is currently in Stages 3 and 4 of Phase 2 (of a 3 Phase process) with authorities conducting detailed risk assessments and preparing recommendations to local government permit authorities for the making of remedial building orders.
Should your strata schemes be subject to a remedial building order, your building may be required to remove and replace some cladding in order to maintain the safety of residents. As recent examples in the media demonstrate, this rectification could run into millions of dollars.
Recent examples such as the Opal Tower building defects saga in Sydney, show how building defects can cause major problems and financial hardship for a strata company, with high costs for building defect reports and rectification being the norm.
It is fair to say that most schemes will not be financially prepared to deal with the impacts of a remedial building order on their buildings or a building defect situation. Strata schemes with suspected cladding or building defects should now begin their financial planning for how they will deal with any possible rectification costs.
Strata Finance Explained
What is it?
When a strata company needs money for cladding rectification costs, essential fire services upgrades, renovation or rectification works, emergency repairs, green initiatives, insurance premiums, litigation or other capital requirements there are essentially three options to choose from:
- use money from a reserve fund (only if a reserve fund has been established and the expense is included in the annual budget)
- raise a levy
- take out a loan to cover the costs
All options are viable and should be considered depending on the circumstances but what if the budget was not allocated in the reserve fund? Special levies are not often the favourite choice of owners as they are required to find the money to pay for this unplanned expense. By choosing strata finance however, funds are provided directly to the strata company and the expense is paid through levies over time thereby taking away the burden of a lump sum. Strata financing provides the ability to commence work immediately without the need to raise unpopular special levies or wait for enough money to accumulate in a reserve fund.
What are the benefits of strata finance?
There are many benefits of using strata finance including the following:
- peace of mind
- the loans are unsecured and offered directly to strata company
- by taking out a loan a strata company is reducing the immediate cost burden for works
- funds can be accessed quickly once approved and projects can be carried out with minimal delay
- cash flow is freed up
- loans can be used to ensure that buildings are compliant and residents are safe now
- improved lifestyle
- strata financing can save time and expense plus provide complete certainty of funding
- it allows emergency works, repairs and maintenance to be completed immediately without further deterioration or risk to health and safety
- finance may offer greater flexibility and peace of mind that capital values and building standards are maintained or improved
- instead of doing small jobs as money becomes available, multiple repairs, maintenance or refurbishments can be bundled into one project, saving time and money whilst minimising disruption to owners
- no large financial burdens
- loan repayments are incorporated into quarterly levies/fees
- there is no mortgage or personal guarantee required to secure a loan
- increase the value of an owner’s asset
- repairs and improvements will help maintain and may even improve the value of an asset
- for investors, rental and tenancy stability are enhanced
Who will benefit from strata financing?
- The strata council will benefit as they will be able to make decisions quickly and not need to drag out the process to raise funds for essential works.
- The owners will benefit as they will not be lumbered with the burden of having to pay a hefty levy. They will also see that the value of their asset is maintained and often improved.
- The building will benefit from having works completed quickly and not experiencing further deterioration or inconvenience to owners.
The decision of which funding option your strata title uses will depend on the circumstances but you do have choices and should consider them all.
One of the biggest advantages of Strata Finance in relation to cladding compliance and building defects is that the strata scheme will have the freedom and flexibility of engaging the necessary contractors in a timely manner and not being prevented from doing the urgent works required because some owners may have neglected to pay their levies.
This post appears in Strata News #319.
Have a question about accessing strata finance if your building is affected by the WA cladding audit or something to add to the article? Leave a comment below.
Please note this advice was provided prior to the proclamation of the new strata title amendments and will be updated in due course.
- WA State Government Urged to Set Aside Special Cladding Assistance Package in 2019 State Budget
- WA: Refurbishment Works – Consider the Impact on Fire Safety
- State-Wide Cladding Audit – Status Update for Private Buildings – 23 January 2020
Looking for strata information concerning your state? For state-specific strata information, try here.