Strata Loan

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  • 12/02/2015 at 10:39 pm #9899
    SnOwl
    Flatchatter

      Dear Flat Chat Members,

      We are a medium size strata (less than 100 units) based in NSW and, you guessed it, we have some serious building defect issues.

      The Owners Corporation (OC) has sought legal advice and investigated the
      defects. End result – we have little chance of successfully suing those responsible and the cost to rectify the defects is considerable.

      Now to get on with addressing the larger defect issues, the OC is about to embark on a strata loan. There is no alternative given the level of costs involved however, it feels as though we take one step forward, two steps back in the decision process.

      I’m wondering if anyone on this forum has experience where their OC has taken out a loan? 

      If yes, what was your experience?

      •   Did you engage any financial or legal advice beforehand?

      •   Were any owners allowed to pay their contributions upfront in a single
           payment – how was this tracked?

      •   Encounter any issues (e.g. how did you address owners who fell behind
           on payments whilst still maintaining repayments on the loan)?

      •   Alternatively is there anything you might have chosen to do differently
           when taking out the loan?

      Any insights would be most appreciated.

      Thank you
      SnOwlSmile

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    • 12/02/2015 at 10:54 pm #23021
      Jimmy-T
      Keymaster

        I have no specific experience of this but to take your second and third points, the repayments of the loan become part of the levies.  People who want to pay in advance are missing the point – loans are their to spread the pain.  People who fall behind on their levies will be subject to the same obligatory penalty rates and should be quietly thankful that you didn’t go down the route of a special levy.

        But there is a bigger issue and that is getting as many people as possibl;e to understand what is happening.

        You need to get a strata loan specialist (like our sponsors Lannocks) to come to a meeting and explain what you are doing and why.  Then you need to send out a newsletter of some sort to those who didn’t attend, again to explain what you are doing and why.

        Then just get on with it.  

        You have a legal duty to maintain and repair common property. It doesn’t matter whose fault it is or even who can or can’t afford it. You have to do it and the Owners Corp has to pay for it by whatever means the majority of owners feel is best.  

        The opinions offered in these Forum posts and replies are not intended to be taken as legal advice. Readers with serious issues should consult experienced strata lawyers.
        20/02/2015 at 2:27 am #23073
        SnOwl
        Flatchatter
        Chat-starter

          Hi Jimmy,

          Thank you for your reply – I wholeheartedly agree!

          I was simply testing my own thinking and curious as to what anyone else may have experienced or insights they might share. Especially if, like us, they have a majority of investor owners who are rarely seen or heard.

          We have certainly experienced the pain of raising special levies in the past – and further experienced the need to seek an explanation from our SM on ‘where did the money go’ when we discovered certain invoices had not been paid.

          My view is that any kind of ‘hybrid’ approach (loan/upfront payment) is not feasible. At best it will be complex to manage financially and at worst it wont matter if you are an owner who has paid up front – the OC (for which every owner is a part of) will still be liable to cover the loan should another owner(s) default at least until such time as money owed can be recovered.

          Based on experience to date, I have every confidence our EC are aware of the need to carry out repairs and doing their utmost to investigate all options so the OC can be well informed on the ‘why’. Obtaining an updated OC contact list from the SM is another story.

          The good news is preliminary works (these costs are covered) have commenced however,we will need to lock in a decision on the source of the full funding in order to proceed with further rectification works.

          Hopefully we will resolve this in short order.

          Thank you again.

          20/02/2015 at 3:44 pm #23079
          kiwipaul
          Flatchatter

            I agree it’s a grey area but I don’t believe everyone should have to participate in the loan IF they can provide their share of the funds up front (before the loan is applied for).

            At a guess the interest rate will be 5-10% and as banks are only paying 4% at max on deposit accounts some owners could decide it’s better to us their saving than participate in a loan.

            Why should these owners be denied this cost saving.

            As for administrating this it shouldn’t be difficult for a competent SM to only bill those who didn’t front up with the money an extra levy per levy cycle.

            20/02/2015 at 6:24 pm #23081
            powers that be

              Hi all,

              We are in a similar position regarding the replacement of windows. Block of 24 units in NSW.  We already have a strata loan, with 4 years to run for the replacement of the roof last year. Some of our owners want to pay for their own windows to be replaced. The benefits to them are that they get the work done now rather than waiting until it is their turn to have the work done in a couple of years time. The benefit to other owners is that timeframe for replacing windows in other units will be shorter, the money we borrow will go further to replace windows for other units. However, we have been advised that those who want to pay upfront for their own windows, will still have to contribute towards the repayment of the loan. The owners are all responsible for the loan debt and it is not possible (nor legal?) to exclude any owner from the repayment of a debt which is owned by all owners. Added to this is that the strata fees of all units is taken into account when working out income of a scheme and whether a loan will be granted. Our advice to date has been as follows, if those owners who have paid upfront are not part of the payment, then it is unlikely to be granted for the remaining owners.

              I would appreciate hearing from anyone whose owners corp has had a few owners pay upfront for a big item as well as taking out a strata loan that is to be repaid by only some of the owners…(excluding those owners who paid upfront).

              21/02/2015 at 12:42 pm #23088
              Jimmy-T
              Keymaster

                OK, I’m going to take a punt here and say that there is a way that this could be done by stepping through sections 110 and 111 of the Act, the first of which allows the owners corp to borrow money and the second that allows the owners corp to  provide a service to lots.

                I hope someone with a better knowledge of Owners Corp finances will have a view on this but here goes.

                The OC borrows the money to get the work done and issues “loans” to owners to pay for the work, according to their Unit Entitlements.

                The owners then repay the loans according to an agreed schedule and their share is apportioned to their levies bill as loan repayment, not as a part of their levies.

                This is the same principle by which some owners have to pay penalty interest for late payment – it’s not a cost that shared across the board but bills come as part of the levies.

                Part of the agreement is that anyone who wants to pay off their loans faster gets priority on having the work done.

                Does that boat float?  Maybe you should call Paul Morton at Lannocks who advertises at the bottom of this page.  He must surely have encountered this before.

                The opinions offered in these Forum posts and replies are not intended to be taken as legal advice. Readers with serious issues should consult experienced strata lawyers.
                21/02/2015 at 2:10 pm #23090
                powers that be

                  Thanks for the reply Jimmy. This is an interesting way to address this issue. I will certainly put this forward to Lannocks and our strata manager as well as owners, so that we can give all owners the opportunity to pay their portion of the loan upfront. The only part I see as a difficulty is, as I understand it, that we cannot pay out a strata loan early without having to pay the interest that would be due on the whole amount if the loan went to term. The owners who do not pay a lump some may be stuck with paying the interest on the whole loan, because they will be paying repayments until the loan term finishes. Anyway I will take it to Lannocks and see what they say.

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