Understanding Strata

Understanding Strata

Funding Options for Strata Improvements

Funding options for strata improvements

Strata improvements are almost always on the agenda for owners corporations. If it’s not mechanical or structural improvements, such as lift refurbishments or roofing repairs, it is aesthetic improvements such as painting or rendering. No sooner is one improvement addressed than another invariably crops up.

This raises the question of funding, with the default option often being to save funds through regular sinking fund contributions or through raising a special levy. There are however other funding options that owners corporations may also consider.

Sinking fund contributions/special levy

Saving funds through regular sinking fund contributions or raising a special levy carry with them the comfort and perceived security of familiarity. They also provide flexibility and freedom for owners corporations to choose their ongoing suppliers or contractors without third party restrictions.

However, what owners corporations must also consider is the funds currently available in their sinking fund and the time it may take to raise sufficient additional funds to carry out the necessary improvements. Waiting to build adequate funds in their sinking fund can lead to a delay in works and potentially increased costs.

The opportunity cost to some lot owners of paying a special levy alongside their capacity to pay the levy, are also key considerations for this type of funding.

Strata Improvement loans

Borrowing is an alternative option, with some funders offering loans specifically tailored for owners corporations to address strata improvements, such as the Macquarie Strata Improvement Loan. [Disclosure of Interest: Macquarie is a sponsor of SCA.]

Such loans reduce the financial dependence on existing lot owners and their levy contributions, spreading the cost of any capital works over a longer and potentially more manageable timeframe.

Improvement works can commence immediately and in some cases there may be reduced disruption for lot owners / tenants by funding and supporting the coordination of a variety of improvements at the same time.

Strata improvement loans also maintain the lot owners’ flexibility to freely choose their service providers. Conversely, owners corporations are required to pass a resolution to borrow funding, which means that a majority or potentially all lot owners must be comfortable with the concept of borrowing. Strata improvement loans generally have a term of five years, and there will often also be an increase in strata levies during the term of the loan to meet principal and interest repayments.

Supplier finance

While supplier finance means improvement works can commence quickly and the immediate financial dependence on lot owners and their strata contributions is reduced, not all suppliers offer finance which may lead to a more limited choice of contractors.

Owners corporations should also be aware that some supplier finance can include contracts for longer term maintenance, again potentially limiting the freedom to choose and review suppliers in the future.

Supplier finance can involve a combination of up-front and ongoing payments, with strata levies often needing to be increased to meet the costs of the works as well as any additional charges or margins.

Conclusion

Whatever the nature of improvements, owners corporations should be armed with a clear picture of all options available and the pros and cons of each, so they can make an informed decision in the best interests of lot owners.

 

Before acting on this information you must consider its appropriateness having regard to your objectives, financial situation and needs. You should obtain financial, legal and taxation advice before making any decision.