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Our friends at Lannocks strata finance company recently talked me through why having an accumulated sinking fund is a waste of money.
Let’s say you have $10,000 in the sinking fund and you have a job that will cost $10,000. If you sit on that for a year you make, say 4.5 percent on interest but you pay tax on that so you end up with about $10,300.
Meanwhile the job cost goes up by, say, by the CPI of 2.5 percent, so it now costs $10,250, but there is also the lost ‘opportunity’ cost – if individual owners had kept that money rather than putting it in the bank, they could have raised at least 4.5% in interest. That brings the actual cost of sitting on the money for a year up to $700.
Thus, in those very simple terms, sitting on your sinking fund is costing owners money.
But there are other less tangible costs.
Maintaining and improving common property adds the value of everyone’s homes so that’s another opportunity cost.
Also, even if individual owners didn’t save the money that they weren’t putting into levies, they had the ‘feel good’ factor of spending it.
And finally, if the work isn’t being done, you don’t get the positive emotional return of seeing the money you have paid being put to good use.
Now, I may have fudged the figures a bit here and there but it’s quite clear that sitting on a ‘healthy’ sinking fund is a huge waste of money and has no tangible benefit for the strata scheme.
The buildings are not at their best and unless you have a big sign out the front saying how much you have in your sinking fund, it will not attract potential purchasers.
The sinking fund is not an emergency fund – it’s a repair and maintenance fund.
And if there are emergencies, our friends at Lannocks will step up with loans which they say make more economic sense than sinking funds in the first place.
It makes all sorts of sense to spend your sinking fund – that’s what it’s there for.
By the way, in reference to KiwiPaul’s posting below, you have to lodge proxy votes 24 hours before the meeting.