Sinking Fund Forecast Plan

What is a sinking fund forecast?

Within the strata scheme industry, a sinking fund forecast is a planned method of accrual accounting. It is based on a set of quantity surveying life cycle principals of future values, overall life and remaining lives of common goods and its likely costs to the Stratum owners that will require contributing each year to its sinking fund plan in order to have sufficient resources to replace and or make good those plant and equipment in question. In addition, it needs sufficient funds to cater for carrying out major repairs and maintenance to the building structure and its materials including any land improved assets within its boundaries. Consequently, these funds will control the common property goods for the benefit of all lot owners which will occur over a time. The time horizon should be no less than 10 years but capturing an overall life expectancy of plant and equipment over a 20 year cycle.

A Quantum QS sinking fund report is a forecast of a 10-year plan (over a twenty year time horizon) of anticipated expenditure to assist the owners’ corporations or the body corporate (depending on which state the Stratum is situated) in accumulating sufficient financial reserves so that expensive capital expenditure can be paid for when required or due to be replaced.

In order to accurately assess the sinking fund forecast, you will need a professional who has a high level of understanding of construction processes and its associate costs. Quantum QS has registered and chartered Quantity Surveyors who are globally recognised as the professionals’ best qualified to estimate lifecycle costings of a building. Lifecycle costings are the same principles of required sinking funds for a building. Some examples of a sinking fund being used for to pay such expenses include but are not limited to:

  • repainting of external  fixtures, walls and the like
  • mechanical and hydraulic services to the basement
  • replacement of fencing and making good of external works
  • resealing of common driveway
  • replacement of common property items such as carpets, roofing and guttering

Under the new provision of the Strata Schemes Management Act 1996 (Section 75A) it requires owners corporations of all new strata schemes, that is, those coming into existence from 7 February 2005 onwards to begin planning for their sinking fund needs for the following ten years. In addition the forecast also gives a reminder for future maintenance and replacement work.

If our building is old do we need a sinking fund forecast plan?

The 10-year sinking fund requirement can now be extended to most other schemes. Under the Strata Schemes Management Amendment [Sinking Funds] Regulation Act NSW 2006, this regulation gradually brought all strata titles under this section in four phases (based on the scheme’s age and thus its strata plan number).

Phase 1: Strata plan No. 50,000 and above (not including those already covered by Section 75A) will be required to commence 10-year sinking fund planning from 1 July 2006

Phase 2: Strata plan No. 30,000 – 49,999 to commence from 1 July 2007

Phase 3: Strata plan No. 10,000 – 29,999 to commence from 1 July 2008

Phase 4: Strata plan No. 1 – 9,999 to commence from 1 July 2009

From July 2009, all strata schemes are required by law to have a 10-year sinking fund forecast plan in place (NSW - Section 75A of the Strata Schemes Management Act 1996).

In the Australian Capital Territory, the Unit Titles Act 2001, Section 51 states an Owners Corporation must maintain the common property. Also under section 62 states the owners corporation must prepare a sinking fund plan followed by section 63B stating a five (5) year review of the plan. In Victoria – Section 46 Owners Corporation Act 2006 states: an owners corporate must repair and maintain the common property. Coupled with Section 36: A prescribed owners’ corporation (>100 lots or >$200,000 per annum) must prepare a maintenance plan. The maintenance plan must set out major capital items (such as lift, heating plant, a/c. etc.) the present condition of those items, when cost, life expectancy once repaired or replaced within 10 years.

In Queensland – Section 152 Body Corporate and Community Management Act 1997 states: Body corporate must administer, manage and control the common property for the benefit of lot owners. In addition, Section 77 - Body Corporate and Community Management Regulation Act 2008, a Subordinate Legislation No. 269 states: First annual general meeting, documents and materials to be handed over include sinking fund budgets. Section 139 – of the same Subordinate Legislation 2008 No. 269 also states: Budgets; the sinking fund budget must allow for raising a reasonable capital amount over at least the next nine (9) years, costs of a capital or non-recurrent nature.

In Western Australia the strata schemes are governed by the Strata Titles Act 1985. Section 36 of the act requires setting up a reserved fund (sinking fund). Consequently, there is no requirement to implement such a plan.

In South Australia the strata schemes are governed by the Community Titles Act 1996 and the Strata Act 1998. Under Section 116(1) it states that a community corporation must establish an administrative fund and a sinking fund. While the Act applies a sinking fund to be kept, there is no expressed duty imposed to prepare a sinking fund. However, this does not exonerate the corporation from the common law duties.

In Tasmania the strata schemes are governed by the Strata Titles Act 1998. Interestingly there is no statute law imposing for a sinking fund plan.

The Northern Territory strata schemes are governed by the Unit Titles Act 2010. Again like Tasmania there is no statute law imposing for a sing fund plan.

Do unit owners have an obligation to repair and maintain common property?

As mentioned earlier strata living is governed under state law. Every state has their own act governing its strata schemes. The interpretations of unit owners obligations and responsibilities regarding repairing and maintain common property may slightly vary somewhat. However, one thing can be drawn from this as can be seen from the below state legislation summary, that all state laws use definitions regarding repairing and maintaining common property to must maintain, shall keep, administer and maintain and so on. Clearly there is a legislative message throughout all the Australian states that all strata schemes have a duty to maintain and keep good condition of their stratum's common property and hence it’s quite apparent that every scheme must be required by law to have some form of level of a planned accrual accounting process better known and referred to as a sinking fund forecast plan to comply with these directives.

Australian Capital Territory – '...must maintain...'

New South Wales – '... must properly maintain and keep in a state of good and serviceable repair...'

Northern Territory – '...shall...keep in a state of good repair and properly maintain...'

Queensland – '...must maintain....in good condition...'

South Australia – ...to administer and maintain...'

Victoria – – '...must repair and maintain...'

Tasmania – '... maintain…in good condition and keep it in good and serviceable repair…’

Western Australia – '... – keep in good and serviceable repair, properly maintain and, where necessary, renew and replace…'

Are there any exceptions to obligations to repair and maintain common property?

There may be some exceptions to the obligation to repair & maintain the common property, such as:

  • By order of Tribunal, Court or other,
  • Where the owners corporation properly determines that it is inappropriate to maintain, renew, replace or repair common property,
  • Where the obligation is transferred, such as, the granting of an exclusive use or special privilege by-law.

Are there any exceptions in not having a sinking fund plan?

Under section 69 of the NSW Strata Schemes Management Act, an allowance of some two lot schemes may be exempt from the requirements of establishing a sinking fund. In the event that the buildings of these two lot schemes are physically detached and both lot owners agree, such a two lot scheme will not need to prepare a 10 year sinking fund plan. However, Quantum QS recommend that a sinking fund forecast be established on these 2 lot strata schemes simply if nothing else, to give peace of mind from a major common item that may be required to be replaced urgently and if there are insufficient funds due to the lack of sinking fund plan then the lot owners may be forced to raise a special levy when they least expect resulting in stress and hardship.

What are the consequences of failing to repair and maintain common property?

Some examples include but are not limited to the items set down as below:

Compulsory appointment of managing agent or administrator

Loss of income / rent of an owner

  • Seiwa Pty Ltd v Owners Strata Plan 35042 [2006] NSWSC 1157
  • Trevallyn-Jones v Owners Strata plan No 50358 [2009] NSWSC 694 - (Water penetration and parquetry floor)
  • Nicita v Owners of Strata Plan 64837 [2010] NSWSC 68

Loss of value

  • Seiwa Pty Ltd v Owners Strata Plan 35042 [2006] NSWSC 1157
  • Nicita v Owners of Strata Plan 64837 [2010] NSWSC 68

Damages

  • Ridis v Strata Plan 10308 [2005] NSWCA 246 - (Resident injured by glass in front door)
  • Seiwa Pty Ltd v Owners Strata Plan 35042 [2006] NSWSC 1157
  • Nicita v Owners of Strata Plan 64837 [2010] NSWSC 68 - (Rectification of building defects not undertaken correctly – water penetration)

Personal injury claim against Owners Corporation and/or strata managing agent

  • Wong v Body Corporate 1 plan No. 433814 P & Ors [2009] VCC 0100 - (Visitor slipped on wet entry tiles)
  • Blaine v The Owners of Duesburys House Strata Plan 7239 [2010] WADC 81 – (Office worker fell down common property stairs)
  • Laresu Pty Ltd v Clark [2010] NSWCA 180 – (Light for common property toilet on timer)

Injunctions / orders to rectify

  • Seiwa Pty Ltd v Owners Strata Plan 35042 [2006] NSWSC 1157
  • Nicita v Owners of Strata Plan 64837 [2010] NSWSC 68

What is the purpose of a sinking fund forecast?

The purpose of a Quantum QS sinking fund forecast is to provide an independent analysis of the Sinking Fund requirements of the Body Corporate as required by the Body Corporate governing Act within the state of origin. It is intended to provide an accrual of sufficient monetary reserves for the long term maintenance and repair of the building and surrounds as well as replacement of common property items. Our report will identify and evaluate the funding requirements for items requiring capital expenditure as detected by our site inspection or by reference to specifications and maintenance contracts or by making an assessment of life expectancy. Life expectancies and years to replacement used in our report are intended as a guide for the purposes of determining a reasonable budget allowance for each year of the fund.

How does a sinking fund help owners protect their investment in the building?

A sinking fund forecast demonstrates to potential investors that provision has been made for future replacement and large maintenance requirements. Property investors are becoming better informed and are learning to ask questions in relation to administrative and sinking fund budgets. They are aware that bodies corporate which do not adequately provide for maintenance and repairs are a source of future expense including litigious circumstance that may arise under the mandatory “obligation to repair and maintain common properties”, regardless of absolute or qualified duty definitions and interpretations.

Does a Sinking Fund Forecast include items that fall under the Administration Fund?

Generally none of these two funds are completely separate to one another, while the administration fund deals with the usual day to day running expenses of the strata the sinking fund associates with major refurbishment of items or total replacement. Therefore, the Administration Fund would fund the following examples; the swimming pool cleaning, lawn mowing and other annual or regular maintenance or replacement requirements. However if the owners corporation would like these additional elements included in the sinking fund forecast Quantum QS can make these by arrangement.

What is absolute duty under repair and maintain common property?

  • Seiwa Pty Ltd v Owners Strata Plan 35042 [2006] NSWSC 1157 - (O/C failed to repair waterproofing membrane and steel uprights)
  • The duty imposed by section 62 is a strict duty and not one to use ‘reasonable care to maintain and keep in good repair the common property, nor one to use best endeavours to do so, nor one to take reasonable steps to do so"
  • Magog (No. 15) Pty Ltd v The Body Corporate for the Moroccan [2010] QDC 70 – (Prada store – water penetration)
  • 7 Oaks North [2010] QBCCMCmr 172 (15 April 2010) – (Roof and water leaks)
  • Magog and 7 Oaks North both applied Siewa and found a strict duty to repair and maintain

What is qualified duty under repair and maintain common property?

  • Boyes v Owners Corporation No. 1 PS 514665E (Civil Claims) [2009] VCAT 2405 (10 November 2009) – (BMW damaged by rats)
  • Found that a strict duty did not apply and that “Under the Act, the duty to repair and maintain the common property, fittings and fixtures is to be carried out with “due care and diligence”’
  • Drexel London (a firm) v Gove (Blackman) [2009] WASCA 181 (21 October 2009) – (New Year’s Eve party – balcony collapse – injuring 35 people)
  • Disagreed with Seiwa and found that the test for a breach of statutory duty is ‘whether the Strata Company knew or ought to have known of the structural defect in the balcony’

Can the Owners Corporation vary a sinking fund forecast plan or period?

Section 62(1) of the NSW Act states that the Owners Corporation can decide by special resolution to maintain in a state of serviceable repair particular items of common property that they consider appropriate. However this resolution cannot affect the safety of any building, structure or common property or detract from the appearance of any property in the strata scheme.

What this means in layman’s term is that a strata sinking fund plan must be in place, however the committee may for example decide to defer some line items such as repainting the external façade from the forecast period of 8 years to 10 years.

How often should a Sinking Fund Forecast be reviewed?

Quantum QS recommends the review of a sinking fund plan every two to four years to ensure your fund remains relevant and up-to-date and to prevent you from paying unnecessary special levies. We can also handle updates or amendments if required.

How does a sinking fund help sell units?

It demonstrates to the potential investor that an appropriate level of monetary reserves have been kept aside in the event of major refurbishment or major replacement of capital expenditure of common property assets. It assures or minimised that nasty surprise that may occur upon post purchase. Investors don’t want to get tangled up in these circumstances which may cause grief and financial burden when the need to raise a major special levy may eventuate.

How can Quantum QS protect your property from devaluation & dilapidation?

Quantum QS is experienced in construction and building costs as we are an independent and chartered quantity surveying firm in construction, so the sinking fund we prepare takes into account details which others overlook. Moreover, sinking fund forecast plans prepared by Quantum QS allows you to adequately budget for the replacement and refurbishment of major capital items in buildings and comply with legislative requirements.

Why a Quantum QS sinking fund is forecast a superior plan?

Many may not know that the location of the building and the building type is just as important in determining the value of the sinking fund? This affects the rate of deterioration of building components, how often replacement is required and therefore the funds required to be set aside by the owners. Quantum QS plans outline what requires replacement or refurbishment with an effective overall life of the component, when this should occur meaning the remaining life of the component and how much budget should be allocated to retain these works. Our forecast entails only commonly owned building areas including its associated plant and equipment. Quantum QS Forecasts entails all types of construction. These include residential, retail, commercial, industrial, healthcare and retirement villages including associated nursing (refer retirement villages heading).

Does a sinking fund forecast distribute costs more equitably amongst owners?

A professionally prepared forecast from Quantum QS will ensure that all owners pay for the cost of dilapidation that occurs during their period of ownership, in accordance with the strata titles entitlement scheme.

How does a sinking fund forecast help the building maintenance programme?

It outlines a written reminder for future maintenance and replacement work. Each forecast sets down an estimated time for the work to be carried out. This can be used as a schedule by the body corporate to remind them of the need for future works.

Will a sinking fund forecast mean the owners will have to pay more money as fees?

Generally yes. However there have been instances where it also the owners paid less. Until a sinking fund forecast is established and prepared, it is very difficult for a body corporate to know how much it should have in the fund at any particular time.

What are the benefits of a sinking fund plan?

An adequately maintained property is worth more at resale than a poorly maintained one. People are aware of retrofits on buildings that have major issues that will cost a fortune to re-fix later. So the kitchen and bathroom may be great, but the strata levies will drain you. Where there is a professional Maintenance Plan in place like Quantum’s, then potential purchasers will feel confident in buying the property. Where people are happy to stay, then it is always reassuring that a professional has covered all the major issues.

What issues may be related to repair and maintenance of older strata schemes?

The issue of maintenance of strata building stock is set to become a major problem in the future as many buildings built in the 60’s and 70’s are in need of urgent care and maintenance. Many of these buildings have insufficient maintenance funds to cover major repair items. The new Act aims to avoid this problem in the future by requiring Strata Managers to plan for maintenance based on a 10 year horizon

Prior to this Act, Strata Managers were required to make an estimate for future expenditure on maintenance and to impose a maintenance levy on owners. Where maintenance issues arose and were of such a magnitude that funds were not available in the maintenance fund special levies had to be required from strata owners to cover the cost of the additional maintenance. Typically major maintenance issues that were generally funded by special levies were items such as roof replacement and concrete cancer and so on. The imposition of special levies on strata owners can provide a heavy short term burden on strata owners and in some cases may lead to them having to sell their asset to pay the levy.

What is Common Property (in a Strata Scheme)?

Common property is that part of a Strata Scheme that is owned by everybody who is a stakeholder under that scheme, not any one individual. The boundaries of common property are defined as the upper surface of the floor, the under surface of the ceiling and all external or boundary walls. It therefore follows that anything that is not part of a lot is part of the common property.

What or how are the common areas determined?

That depends on the schemes registration date. Plans registered prior 1 July 1974 in theory include the lot as a centre line through a concrete floor and wall. A balcony may be within the responsibility of the lot owner. Strata Plans registered post 1 July 1974; the boundaries of the cubic space forming are the boundaries of the lot. The internal walls are within the lot.

What are 'Unit Entitlements' and what are they used for?

Every strata scheme contains a list of the lots in the strata plan and an associated allocation of a 'unit entitlement.' The unit entitlement is a whole number and the total of the unit entitlements on the plan is called the 'aggregate unit entitlement.' The unit entitlement is used to determine the lot owner's on the following:

  • Their apportioned share in the common property
  • Aggregate weighting of voting rights when the voting is conducted by means of a poll
  • Apportioned share in distributing surplus monies in the administrative or sinking fund
  • Proportion of maintenance levies; and
  • Obligation to contribute to repair and maintenance of common property under a joint exclusive use by-law
  • Right to share in compensation monies paid by any public authority resuming the whole or part of the common property

Why Quantum QS should prepare your strata schemes 10 year sinking fund forecast plan?

We are registered and chartered Quantity Surveyors with specialist skills in property and construction economics and asset management. We have set up a special division dedicated to helping Strata Managers and Owners' Corporations comply with state legislative change and allow compliance with Local Authorities rules and regulations. A sinking fund forecast plan prepared by Quantum QS will help you to:

  • Better manage cash flow
  • Identify existing defect or maintenance issues
  • Possibly identify likely defects before they occur
  • Retain  and possibly improve the property resale value
  • Reassure potential investors that the property has no major surprises or costs
  • Ensure that sufficient money is allocated to cover maintenance and capital costs
  • Forecast likely maintenance and capital works cost over a ten year time horizon period
  • Prevent problematic areas ahead of time recommend preventative maintenance programs
  • Overall assist in maintaining the good condition of the buildings and its associated assets