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I promised the Paul Morton of Lannock Strata Finance would provide us with some information about why he thinks strata loans are better than special levies and even, to some extent, Sinking funds. Here it is.
Paul’s main points are:
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Like all forms of funding in strata, sinking funds have advantages and disadvantages – the trouble is, few people stop to think of the disadvantages
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A very important disadvantage is that sinking funds are very expensive, usually more expensive than strata borrowing or having a special levy
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In the example that Jimmy and I worked out, a sinking fund would cost owners between 18% and 20% per year!
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The responsible way to approach funding capital works is to consider the advantages (and disadvantages) of each form of funding as they apply to your particular situation
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The responsible solution is likely to be a mix of all three methods – special levy, borrowing and sinking fund
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Best practice would be to seek to build a sinking fund for 20% of your expected capital works budget and to review your situation annually to check that it’s right for you
You can download Paul’s entire paper “Why your sinking fund is costing you money” HERE. Meanwhile, here’s the rest of the text:
The Details
Sinking Funds – not as good as we used to think
Most people think a sinking fund must be a good thing – it’s cash on deposit that accumulates for the day when you’ll need to do some major works.
Unfortunately, not many people understand the disadvantages of a sinking fund, in particular, that it will cost you money.
Three ways a sinking fund costs you money
There are three ways a sinking fund costs you money – let’s start with the easiest, interest and tax.
Low returns that are taxed
The earnings of a sinking fund are limited, usually to bank term deposit rates. And the interest it earns is taxable, so, whatever rate you are getting for your deposits, take 30% away because that goes to the tax man. But doesn’t everyone pay tax so that just evens out in the wash? No, many don’t. If you are a retiree or on any kind of fixed income, or if your super fund owns your strata investment, or for a host of other reasons, it’s likely that your tax rate is less than 30% or you pay no tax at all, so that sinking fund is starting to cost you compared with what you could do yourself.
Inflation
Next is the cost of the project. While you wait to accumulate funds in a sinking fund, the money in the sinking fund is subject to inflation. And this is not just the Consumer Price Index! The costs of strata capital works are more likely to rise in line with the Labour and Materials Index. Also, whilst you are waiting, the scope of the work may increase, thus adding to you costs. And you may be paying higher maintenance costs in the interim. (Project inflation won’t apply if the works are going to be done in the future, but if they need to be done now then a sinking fund is a very poor option).
There are better things you can do with the money
But the most significant cost of a sinking fund is ‘opportunity cost’. Everyone strata owner should be thinking about what is the next best thing they could do with the money. If you have credit card debt at the end of a month, then you would be better off with that sinking fund money in your own hands so you can pay off the credit card. If you have a mortgage, you would be better off taking the money from the sinking fund and putting it against your mortgage.
It’s relatively easy to measure the ‘cost of the lost opportunity’ of not reducing your credit card debt: that’s about 20%pa for most people. And the cost to you in leaving money lying dormant in a strata sinking fund when you could have a lower mortgage will be about 5 or 6%pa. If you have any credit card debt at the end of the month, then the last place you want your money is in a strata sinking fund.
However, for some people that cost will be a bit harder to calculate – what’s the cost of not having a holiday? Or not being able to help your kids? Or not being able to replace your old car?
Summary
In summary, a strata sinking fund costs you money in three broad areas. First is that the returns are limited and are reduced by tax. Another is that the cost of the project will get bigger all the time you wait. Most importantly, most owners will have much better places to invest their money – perhaps in reducing credit card debt, perhaps in a mortgage or perhaps in something that is very important but hard to calculate as a percentage.
What does this mean in real terms?
When Jimmy Thompson and I sat down to work out a few examples, we calculated that a sinking fund would cost a strata owner between 18% and 20% per year!
This should be shocking to most people, as we’ve been seduced by the notion that a sinking fund must be a good thing. Of course, your property and your situation may be different and that’s why it’s very important to consider the actual costs that apply your particular property and your particular financial circumstances.
At Lannock, we’ve analysed hundreds of buildings. On average, sinking funds cost owners between 10% and 15% per year.
What about a special levy? The most important part of the cost of a special levy is ‘opportunity cost’, that is, “what’s the next best thing you could do with your money”. Our analysis has revealed that the average special levy costs an owner between 11% and 13% per year.
And the cost of borrowing? Currently about 10% to 11%pa.
Making Responsible Funding Decisions
This information has important ramifications for the decisions of owners, executive committees and governments, as well as being important for strata managers.
If the sinking fund in your building, like the examples Jimmy and I looked at, will cost owners 18% or 20% per year, what does that mean for people who have the responsibility to manage the finances of a strata corporation? How do you responsibly manage the financial needs of a strata scheme when one of ways of funding capital works is so expensive for so many owners?
Here are the things to consider:
- What are the relative merits, that is, the advantages and disadvantages of each way of funding capital works?
- How do these apply to your particular property and your particular personal situation?
- How do they apply to the owners in your property as a whole?
- Given that each form of funding has advantages and disadvantages, what’s the responsible thing to do in your situation?
It’s clear from our analysis that there can never be a one size fits all approach to funding the capital works in your property. A block of 10 in one area will have different needs to a block of 10 in another area or a block of 100. And residential will be different to commercial. And one owner’s needs will be different to the owner next door.
As a way to consider this, the following principles are likely to apply:
The best form of funding is likely to be a mix of special levy, sinking fund and borrowing.
If your goal is to have a low cost of funds, then it’s likely that borrowing will be a significant element in that mix, most likely more than 50%.
If there had to be a single solution for all of strata, Lannock would recommend you seek to have a sinking fund at 20% of your future capital budget requirements and each year assess the situation in the light of the facts at the time. That way you’ve established a culture of properly considering the future, you have some funds in hand to start a project or deal with an emergency, and you have a plan to reconsider the matter on a regular basis to ensure that it’s still relevant.
Lannock has analysis tools that can help you do this (including the tool that Jimmy and I worked through) – just call or email.
Lannock Strata Finance
1300 85 15 85, 02 9357 5371, strata@lannock.com.au
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@Rita C said:
This work, which is covered under home warranty insurance … will result in the relocation of the tenants, for which insurance is provided, and loss of rental as a result.I have just re-read this – am I missing something or is loss of rent covered by this policy and, if so, what’s the question?
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@Boronia said:
If you had a stand alone property which you rented out, and similar works were required to it with the same effect on your tenant(s), what would you do? Who would compensate you?This forum is about strata. Nobody shares the benefit of work done on a stand-alone house so why should anyone share the cost? Everybody shares the benefit of work done on common property so why shouldn’t they share the pain.
Don’t forget, the owner is also paying for their share of repairs Why should they also lose thousands of dollars in rent just because their unit is in the wrong part of the building?
We really need to stop thinking that strata units are the same as houses. Shared responsibility and shared benefits are the key concepts that hold strata together. There is absolutely nothing comparable in free-standing houses.
It’s when you start trying to apply free-standing house ‘rules’ to units that we get into trouble.
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Struggler,
You have to assume that you are not alone in this and with that in mind, it may be time to get rid of your Executive Committee and strata manager and, if the owners won’t vote them out, apply to have a Strata Manager appointed by the CTTT, especially since you have reported in the past about the lack of any desire to get involved by other owners.
I deliberately chose not to use the word ‘apathy’ because that implies people don’t care. In your case, as in so many others, owners do care but not enough to get involved in doing any work themselves.
So I would be sending round a letter to all owners informing them that the poor management of your strata scheme is costing them time and money. The bleach killing the plants is just the most obvious example.
In your letter, you should point out how easy it is to organise these things – if you have the will or basic nouse to do so.
For instance, in the case of the painting, at the EC’s request an efficient strata manager would have worked out how long it was going to take to paint each unit and then given owners a phone number to book their times on a first come, first served basis. Someone in their office would have a grid and all the names and phone numbers of owners would be slotted in to vacant time slots.
Owners who called but couldn’t make any of the available time slots would be given the opportunity to organise another time slot on a catch-up day. Owners who didn’t call would be told they would have x days in which to organise a time at their convenience but there would be a special call-out fee to bring the painters back to the complex.
This is not rocket science and it’s a system that’s used in strata plans all over Australia every day.
Why, you should ask your owners, should you have to put up with third-rate service which is a false economy because the EC is incapable of doing the most basic tasks and the strata manager is no help. It is time for the owners to clear out the EC and take control themselves. Failing that, you will be applting to the CTTT for the statutory appointment of a strata manager
I would also inform them that Statutory Strata Managers are notoriously strict in their implementation of the law – they won’t cut corners and they will charge top dollar. Even so that is better for the building than a culture of saying nothing and doing less.
You could try to organise a meeting of like-minded individuals but you should be prepared to follow through on any threats to go to the CTTT iof you make them.
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@kiwipaul said:
The default QLD bylaws like those in NSW don’t allow residents to cause a noise nuisance or make a mess on the common property (or even lot property if it’s visible from the common property). Also how often do residents refurbish kitchens or bathrooms (not exactly an annual process).A couple of points – we have those default noise and mess by-laws but they don’t prevent cowboys who don’t bother to read by-laws suddenly launching renovations or, worst of all, deciding to renovate themselves on evenings and at weekends.
Approval of a renovation schedule doesn’t require a by-law unless changes are being made to common property, in which case it does. My building has a catch-all by-law that says any changes made to common property (after the by-law was registered) become the ongoing responsibility of the owner of that lot.
The issue then becomes one of when were the renovations done and who did them. That’s why all renovations have to be approved with a schedule of works ticked off by our EC and building manager. If anyone decides to go “cowboy” on us, they suddenly find access to the lifts, garage and potentially even power to their unit is severely restricted (admittedly we are a large building of more than 130 units, with a building manager and electronic access to lifts and the garage).
How often do people renovate? Aproximately every seven years and in a building of our size which 12 years old, that means roughly one every couple of months or so. That’s why you want to be able to allow people to renovate but still control the noise and mess as much as you can
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@Boronia said:
If you had a stand alone property which you rented out, and similar works were required to it with the same effect on your tenant(s), what would you do? Who would compensate you?With a stand-alone property, you could choose if the work was going to be done, when it was going to be done, how long it would take and you’d be be the sole beneficiary of the work when it was completed.
In strata you could have to put up with the disruption of work that might only interfere with your apartment but have no direct benefit to you.
If your stand-along home owner’s work blocked the driveway of the house next door, would you expect them to suck it up and not complain? You don’t lose all your rights as an individual just because you buy a strata unit.
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I pity the poor neighbours who have to put up with all this work when there are no restrictions over working hours, noise , mess etc. Fotr instance, in our block permission to do this kind of work comes with controlled times for things like hammer drilling, so that it can all be dealt with in one or two spells, not be a constant that goes on intermiitently for weeks.
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@Whale said:
So again check your O/C’s policy because if it includes that cover as an appended “special benefit” your loss would be claimable in those specific circumstances, but otherwise the O/C is not legally liable.At the risk of taking on the mighty Whale, I think there’s a subtle difference between the OC being ‘liable” and being covered. The insurance isn’t likely to cover them if they’re not liable. However they could be liable but not covered. All that means is they would have to cover their liability themselves. And I would say they are liable to some extent and unless it’s a very small block, it’s probably worth pursuing.
However, there is no clear mechanism for this and Rita C would need to make a claim – send them a bill – in the first place an see where that got her.
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It’s not unusual for Owners Corps to adopt this Memorandum as a by-law (because it doesn’t have any legal effect until they do). But it is a flawed piece of work and the grey areas between common an private property are where the cracks really show.
In your case, I would say that where a pipe has entered your property is when it might become your responsibility and if it’s in common property, like an external wall or in the ceiling, it hasn’t entered your property.
Elsewhere today we’ve had one of our StrataGurus Whale explain why a by-law telling everyone they have to look after their own windows isn’t legal because it attempts to over-rule strata law.
H quotes the Act saying this:
Sect 62 (3) of the NSW Strata Schemes Management Act (SCMA) only permits an O/C to make that decision where it “will not affect the safety of any building, structure or common property in the strata scheme or detract from the appearance of any property in the strata scheme.”
I would argue that relinquishing control of water pipes in common property might compromise the safety of common property – if there was a leak and you chose not to attend to it – and therefor that clause might render the by-law defunct.
The “who owns what” Memorandum is a helpful guide but when Owners Corps use it to shed all their responsibilities, it becomes a dangerous document. I reckon you could challeng e the by-law now or in the future if a problem ever occurred.
Look at it this way, if there is a fault with common property that causes a leak in a pipe, why should it be your responsibility?
Sounds like what you need is a good hard look at your levies and realistic plan to get back in the black. Stopping people from making legitimate claims for repairs isn’t going to do the trick.
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Bad idea. I can think of four good reasons for not doing it.
Firstly, you lose control over the look of the windows which affects the look of the building and therefore the value of all apartments.
Then if someone refused to fix their windows it can affect the integrity of the structure if there is ingress of water into the cavity between walls.
Thirdly, it undermines the sense community and shared responsibility. How about if the majority of the people in the building make the roof the sole responsibility of the people on the top floor – hey, we’re in the majority and they ARE the roof for the people one floor down. If people don’t want to live as part of community, they have these really cool things called houses.
Finally, if one side of the building suffers more wear and tear from weather than the other three, there’s your 25 percent vote that could and should block any changes to the by-laws.
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@chak said:
Can we call an EGM if we have enough unit entitlements between us and not go through the SM?Requests for an EGM go to the secretary. This is what the Act says:
The secretary of an executive committee or, in the secretary’s absence, any member of the executive committee must convene an extraordinary general meeting as soon as practicable after receiving a requisition for such a meeting signed by one or more persons entitled to vote in respect of one or more lots, the unit entitlement or the sum of the unit entitlements of which is at least one-quarter of the aggregate unit entitlements.
Can an owners request for the Strata Roll on his own or can we as a group with enough unit entitlements (more than a quarter of the total unit entitlements) request for the Strata Roll?
Any owner can ask to see the strata roll. The strata manager can charge a modest fixed fee ($28??) for showing you the roll and additional charges for photocopying it.
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You need to look at the contract you have with the Strata Manager to see what the terms for dismissal are. They often require you to give them three months notice that you intend to either terminate or not renew their contract (under normal circumstance where they have fulfilled all their contractual duties).
You can, by special resolution, declare any or all the seats on the EC vacant at a General Meeting provided you a) have a motion to do so on the agenda and b) not more than 25 percent of owners voting at the meeting (in terms of their unit entitlements) vote against it.
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As we know, hindsight has 20-20 vision but I think if anyone else encountered this and wasn’t happy that their alleged breach was on the record and unchallenged, I would be tempted to recommend that they responded by repeating the allegedly “offensive” language and challenging the EC to either take them to the CTTT or issue an apology and withdraw the Notice To Comply.
At least that way there would be either a resolution at the CTTT or a record of the EC’s failure to respond.
I actually think this by-law is way too loose in its wording to have any legal basis and, although there are no Freedom of Speech laws in Australia, I would think that the question of taking offence lies too much within the potential for any given person to be offended to have any real weight.
For instance, if someone at an EC meeting made a comment that I was a typically tight-fisted Scotsman, some might find that amusing while others, especially Scots, might consider it a racist comment (not without reason). Is it offensive language – well,it is to anyone who’s offended by it. (I wouldn’t be – but then my tight fist is multi-functional.)
To take another example, if someone says I made a stupid mistake, and I had, I might take offence on the basis that, while the mistake was mine, I resented any inference that I am stupid. I wouldn’t pursue that because I’m not THAT stupid, but I know people who are less insensitive than I, who would be offended.
This is all part of the cut and thrust of daily politics, which is what being on and dealing with ECs is.
To get back to the original question: should the adjudicator have made a ruling under Section 138 which, according to the CTTT application form is to “To resolve disputes or complaints”. This is a catch-all section for disputes that aren’t covered by other specific sections of the Act. It also specifically refers on the form to ..
… the general power of an Adjudicator to settle a dispute or complaint about the operation, administration or management of a strata scheme, or functions conferred or imposed.
Examples of general disputes or complaints include the following: … Compliance with by-laws
So, regardless of what the plaintiff could or should have done, it was within the remit of the CTTT adjudicator to rule on this. That they chose not to do, left the matter open to an appeal at either a hearing or at the District Court.
However, right now, the simplest thing to do is, if you feel you have been wrongly maligned and you want this on the record, to go back to the point I made at the beginning. Send a letter denying that you have breached the by-law, repeat the allegedly offensive language and defy them to either take you to the CTTT or withdraw and apologise. My bet is they will do neither but at least that’s on the record.
Finally, the current ‘model’ by-law in Schedule 1 is
An owner or occupier… must not use language or behave in a way which might offend or embarrass others using common property.
Note the words “using common property” which are not in the by-law allegedly breached. If you had the time and the inclination you could run a case at the CTTT under Section 159 “to invalidate a by-law because the Owners Corporation did not have power to make it” on the grounds that its terms are too broad and therefore conflict with other areas of the Act that allow owners to express their opinions verbally and in writing under a variety of circumstances.
But please bear in mind that I am not a lawyer and you would be well-advised to talk to someone who is before taking any of the preceding advice.
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If I were a lawyer (which I am most definitely not) I might be looking at this owner’s previous arrogant and aggressive behaviour and thinking that someone has told him he’s going to lose and now he’s trying to mitigate his losses at your expense.
In fact, his offer is an insult to your intelligence. Look at it this way, on weekdays, chummy upstairs may spend 8 hours in the bedroom but only half an hour getting into and out of bed. The eight or so hours he spends in the living room will be clomping around on his timber floors.
So his “compromise” is to save you from half an hour of noise out of every 24. Think about weekends when you can double the time spent having your peaceful enjoyment shattered by this chancer.
In your position, I would not accept anything less than full carpeting in all living areas except those you have mentioned. You don’t have to offer anything by way of compromise but I would concede that he doesn’t have to rip up the wooden floor provided he carpets the whole area and a) it reduces the noise completely and b) he provides a legally binding agreement that applies to current and future occupants of the lot, never to expose the floorboards again.
The price of not going to the CTTT may be way too high if it means most of the noise for most of the time is going to continue.
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I am going to take a slightly out of character punt here and say that the CTTT may be taking a belt and braces approach to this so that your selfish upstairs neighbour can’t come back and claim they were treated unfairly under the law, triggering another appeal to your District Court.
This can often be the impression given when a judge or adjudicator appears to be doing everything they can to favour one side of a legal case when in fact what they are actually doing is closing every possible appeal loophole to prevent someone whom is clearly an a**hole from using the law to avoid observing their social and legal responsibilities.
Someone I know very well recently had a defamation case against them thrown out with all costs awarded against the paintiff. But if you read all the pages except the one with the judgement on it, you would think that the opposite was going to happen because very possible ground for defamation was examined in detail.
However, it turned out the judge was just opening doors so he could slam them shut. It’s different but, I think, similar.
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