Leary & Partners Quantity Surveyors Asset Management Consultants Taxation Depreciation Consultants S
To demonstrate compliance with the legislation 1. To provide a reliable basis for budgets 2. To produce predictable outgoings in line with owners’ incomes 3. To avoid special levies as a result of poor planning 4. To provide funds to meet maintenance requirements 5. To act as a maintenance calendar 6. To minimise maintenance related owners corporation disputes 7. S
A body corporate must establish and maintain a sinking fund to pay for: • anticipated expenditure of a capital or non-recurrent nature (including particularly common property painting), • the periodic replacement of items of a major capital nature, and • any other expenditure that should reasonably be met from capital [sec. 139(3) Standard Module] S
The body corporate’s sinking fund budget must take into account both expenditure to be incurred in that financial year and “an appropriate proportional share of amounts necessary to be accumulated to meet anticipated major expenditure over at least the next nine years after that financial year” . [ sec. 139(3)(a)] The annual sinking fund levies must be set at an amount that covers the expenses calculated in under section 139(3). [sec. 139(3)(b)] S
Accrual accounting in action • deterioration of the building and its components occurs slowly • a professionally prepared sinking fund forecast matches levies with the rate of deterioration of the building • owners pay for their proportion of maintenance costs • equity in owner contributions is ensured over the life of the building S
The user pays • an owner cannot avoid paying for his or her share of the maintenance costs by selling out before the maintenance costs are due • owners who purchase a unit in an older building can be certain they will not inherit other people’s accrued expenses S
Predictable replacement items Before you can justify asking unit owners to contribute towards the future maintenance of an item, you must be able to show that you can reasonably forecast • that an expense will occur, • approximately when the expense will occur, • the estimated cost. S
Typical replacement items include • replacing carpet • replacing gutters & down pipes • replacing pumps and motors • replacing major lift components Predictable repair items include • Painting • timber fences • pool surfaces S
• minor one-off costs (i.e. cutting a new door key ) • items with overall lives of 12 months or less (i.e. filtration cartridges or light bulb replacements) These costs should be paid for from the body corporate’s administrative budget S
A structural defect, in the context we are talking about here , is a major failure in one of the building’s core elements , things like concrete spalling to walls or foundation subsidence. These items tend to be the result of inadequate design, defective materials or bad construction practices. In many cases, the problem is revealed by the failure of the element. There is no fore-warning. • they are a one-off event • they are not predictable • they cannot be included in a forecast prepared prior to their occurrence S
You can’t budget for the rectification until you have identified the problem and gone through the process of working out what remedial action is going to be required. • they may be included in a forecast prepared in the year of their occurrence S
If the fault requires immediate rectification you have two funding options. 1. either you meet the cost from a special administrative levy, or 2. mitigate the impact on the owners by paying the cost out of the existing sinking fund balance (assuming there are funds to cover it), then rebuild your fund to the necessary balance by using larger ‘catch up’ levies in the following years. S
A refurbishment is an upgrade to existing finishes as opposed to the normal repair and replacement of items. It often involves the replacement of items prior to the end of their physical life. • relevant to high profile buildings • relevant when buildings need to compete with newer developments - hotels are typical • where there is a fair degree of certainty that a refurbishment will be required, it may be considered a predictable expense • may be included in the sinking fund forecast • often require architectural design • design is then costed and included in forecast S
• we carry out a thorough site inspection • we determine what items should be included in the sinking fund • we establish the variables used in the forecast calculations • our software calculates the optimum contribution scheme • the report is quality assurance checked for quality assurance purposes S
The quantity surveyor identifies those items in the building which will require either major repairs or total replacement over the sinking fund period. • The choice of sinking fund period has a major impact on the forecast results. • A forecast based on a 10 year period may give a substantially different result to one based on a twenty year period. S
• The 10 year forecast will result in a fluctuating contribution stream. This is because a 10 year time frame does not capture the life cycle of large expensive items such as lifts. As a result, each year when you recalculate the forecast, large expense items may be being added or omitted from the calculations, causing significant variation to the levies. S
The object of the exercise is to capture the majority of expense items, and provide a long enough lead time to accumulate the funds at an affordable, predictable and constant rate. Our experience has taught us that all forecasts should cover a minimum of at least 10 years, and that a longer period of up to 15 years is probably required for the majority of strata complexes. However, we don’t recommend a forecast period longer than 20 years because after that length of time the variables become too unpredictable. S
the cost to repair or replace the item (at today’s value ) • • their First Replacement [the number of years before they will require replacement or repair] (FR) based on their age & condition • their Replacement Cycle (RC) [frequency of replacement or repair] based on industry standards and our experience with similar buildings S
• forecast inflation: allowance is made for the future cost of repairs and replacements to increase in line with inflation. • interest: the bank interest earned on the sinking fund balance is taken into account when calculation contribution requirements • tax levels: tax is deducted on the interest earned by the sinking fund at the current company tax rate S
• contingency value: an allowance is included in the total estimated expenses in order to cover minor unforeseen costs or variations in estimate cost due to factors such as minor changes in item specification. (Our standard default is 10% of the total value of the forecast expenses. This is variable at the body corporates’ request. ) • minimum balance: The minimum balance below which the sinking fund should not fall is set. (Our standard default is the contingency value. This is variable at the body corporates’ request.) S
• the date the forecast is to commence: the date on which the forecast will commence is set. This is normally the first day of the body corporates’ next financial year. • the existing sinking fund balance at the start of the forecast period: in determining the contributions required the software takes into account the sinking fund balance as at the day the forecast commences S
Our in-house software utilises a complex series of goal seeking macros which calculate the possible contribution schemes repeatedly until it finds the contribution scheme which best meets 3 key goals. • It ensures that all expenses can be met - the calculated sinking fund forecast can never have a negative balance and in any year should never fall below the set minimum balance. S
• It minimises unit owner levies - it enables all expenses to be met while requiring the minimum possible contribution by owners over the period of forecast. • It achieves a steadily increasing contribution scheme that rises in line with the increase in inflation - unit owners require a contribution scheme that behaves predictably and which allows for logical budgeting. This goal may not be completely obtainable where the sinking fund balance at the commencement of the calculation is below the required level S
• the draft is checked in detail by the quantity surveyor who prepared the cost estimate • a secondary quality assurance check is done by another senior quantity surveyor • a draft report is sent to the body corporate for comment (if requested) • any changes are made and the final report is issued. S
• Where the legislation requires a scheme to have a 10-year forecast, the forecast must be reviewed when it no longer contains an estimate of expenditure of the required 10 future years. • We recommend a review of the sinking fund forecast (including a site inspection) should be carried out at least every three years. This allows an opportunity to ensure that items are wearing at the anticipated rate and that new maintenance requirements have arisen. S
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