updated 15th October 2016
Most investors in strata titled properties
can recount at least one negative experience they’ve had with the property, whether it’s with the residents or the strata managers.
“People frequently want to complain to me about their strata managers,” says Paul Morton, managing director of Lannock Strata Finance.
“But when I start to hear a complaint, the first thing I suggest is that they look at how much they’re paying their strata managers – because if you pay peanuts, you will get monkeys. And if you want good service, you need to pay for it.”
Morton says the key is in understanding what you really want. “Is it the premium service you’re seeking, with everything that goes with it? Or do you just need the base level of service? Because if you’re wanting a Rolls Royce and you’re paying for a Mini Minor, the service will not match the expectation.”
When serious problems arise in strata complexes, such as building defects and water leakages, it can be hugely frustrating for both investors and strata managers, as there are difficulties if you commence the capital works before all monies have been collected from owners. This can affect quality of life, and, in some cases, health and safety, of tenants.
When balconies start falling off and water floods through bedrooms, the situation can become untenable, and the owners corporation could be vulnerable to being sued if someone is injured because the repair wasn’t fixed quickly enough.
“There is a potential for legal liability. It’s not unusual to have bits falling off, if the windows are damaged or there’s a problem with the roof,” says Morton. “If there’s an issue that arises as a result of the problem not being fixed quickly enough, that’s a potential claim against the body corporate.”
In these situations, there are three funding options available.
You can save the money in a sinking fund, but that takes time and is subject to inflation and tax as well as the possibility the problem will get worse while you wait.
You can elect to pay a special levy, which requires each lot owner to chip in a set amount. This levy is not usually tax deductible, and can often run into the thousands of dollars – and the process of collecting this money can drag on.
The third option is strata funding, where funds are loaned to the owners corporation for major repairs, maintenance and upgrade expenditure on building common areas.
Borrowing by the strata corporation can complement the sinking fund and avoids the requirement of a lump sum special levy, and the money can be sourced immediately, such as for a one-off emergency repair.
“Funding direct to strata corporations is available immediately and it’s often the cheapest option,” says Morton. “Sinking funds, in our analysis of over 300 buildings, work out to be most expensive funding option in 75% of cases… once you consider that they are subject to tax and inflation and incorporate a high “opportunity cost” – the cost to owners of having funds allocated in this way. And often people don’t have instant access to a lump sump of money for a special levy.”
Morton says funding terms should match the lifespan of the asset. “For example, if you’re borrowing funds to repaint the exterior of the property, the paint will probably last about six or seven years, so the loan period should be for the same period,” Morton says.
Owners should keep in mind that strata borrowing is another long-term financial obligation. Investors should carefully consider their options before seeking strata finance – it will add to your property maintenance costs, and higher strata fee commitments can be unappealing to buyers if you plan on selling.