Sinking fund shock: Massive pot of money could cost you thousands

New buyers of lots in community title schemes that possess a massive sinking fund balance need to be aware that it is not a magical pot of money to cover any major problem.

The funds are collected to cover foreseeable maintenance issues over a rolling 10-year period.

The maintenance could be anything from replacing windows, roofs and upgrading lifts to painting the exterior, resealing the pool or upgrading security systems.

It’s why a sinking fund needs to keep pace with inflation and increases in building costs to future-proof the property financially.

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It is not, as some may think, a rainy-day savings account for unbudgeted expenses and nor should a massive sinking fund be a reason to reduce levies.

In fact, not increasing levies in line with at least inflation, can create a financial time bomb.

Anyone buying a new lot needs to be wary, and not delighted, if the sinking fund levy is a relatively ‘cheap’ expense in a cost-of-living crisis era.

Do your homework to determine if the sinking fund forecast is in sync with inflation and factors in rising costs, and if foreseeable maintenance repairs have been included into the budget.

A body corporate must, by law, maintain the common property in a good and structurally sound condition.

That may mean having funds put aside to paint the exterior every 10 years or replace windows in coastal locations every 25 years.

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Even with a two, three or four million dollar sinking fund staring you in the face as you sign for your new acquisition, you could still be required to dip deeply into your bank account for a special levy for an unbudgeted maintenance issue.

A recent example of this was the serious fire risk surrounding combustible cladding on multistorey, community-title scheme buildings.

The cladding safety crisis sent shockwaves through bodies corporate around the state. It was not a foreseeable maintenance issue and caught many bodies corporate by surprise.

No bodies corporate, if any, had factored in their sinking fund to replace fire-risk cladding.

Depending on the urgency of the replacement, a body corporate may need to raise money through a special levy, which can be raised over a period of time, or a bank loan.

A special levy can be raised through an ordinary resolution at a general meeting of lot owners.

It requires a majority of the votes cast for the motion to carry.

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A body corporate may propose to borrow money. However, under some regulation modules, the motion would only carry if every vote cast was in favour.

Be mindful, a body corporate cannot legally move money from an administration fund to a sinking fund or vice versa.

Once the funds are deposited into either fund, they can only be used for their budgeted purpose.

The new seller disclosure requirements mean the sinking fund balance will be disclosed to the new owner on the body corporate certificate.

This information should be read in conjunction with the forecast expenditure to ensure the funds, and future deposits, will cover what is needed.

Ideally, a new owner should be looking for a healthy sinking fund and a healthy administration fund, depending on the size of the property and whether the community title scheme is registered as a building format plan or a standard format plan.

A building format plan is typically multi-level unit blocks but can be townhouse complexes.

Under this format plan, the body corporate has a responsibility for more maintenance requirements such as the roof, lifts and structural elements of the buildings.

In a standard format plan, more often than not, in townhouse complexes and residential estates, the owner takes on more responsibility, such as the roof and foundation structures.

* Jane Wilson is the Queensland Commissioner for Body Corporate and Community Management.

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