for everything you need to know about strata...

"Strata wouldn't be Strata without levies but they are a critical and essential part of ensuring you protect the value of your property.  They have been, are and always will be a major component of strata life and there wouldn't be a strata scheme anywhere that could survive long term without the money received from levies.  Now, certain levies must be determined and administered by the Owners Corporation with levy notices being issued on a regular basis.  Here's an idea of what's involved in the whole process."

STRATA LEVIES & SPECIAL LEVIES

• Why Levies are necessary
• Healthy future
• Administrative Fund
• Sinking Fund
• Now it's required....
• Special Levies
• Special circumstance
• Alternative ways to pay....
• Determining Levies
• New Schemes
• Unpaid Levies
• Interest Penalty
• Extra information resources

---

Why Levies are necessary

All strata schemes impose a regular strata levy, usually collected quarterly, on all the lot owners.  The money collected is then used to fund the running and maintaining of the scheme.  Without levy payments a strata scheme wouldn't be able to pay those running costs resulting in a slowly deteriorating complex and a subsequent drop in the market value of every property in the scheme.  Just as a car needs regular servicing and maintenance to remain trouble-free, a strata scheme also requires on-going 'maintenance and attention' to many of the parts that makeup the complex.......

Healthy future

It's interesting to note that the amount of money sitting in a scheme's bank account can be a good indicator of what type of future will be faced by scheme's lot owners.  If an examination of the account shows that available funding is sufficient to meet anticipated ongoing running, repair and maintenance costs (plus some in reserve for emergencies) then all is well and good.  However, if the account is low on funds or, worse still, empty then the future may be a bleak one.

Top

---

Levy Types

There are three types of levies:

• one to cover the day-to-day running expenses (administrative fund levies)
• one for long term repairs and maintenance (sinking fund levies)
• and lastly, one to cover all those unexpected events where no funds were allocated (special levies)

Administrative Fund

The Administrative Fund, under the control of the Owners Corporation, is used to pay for all the 'day-to-day' and 'regular' expenses of a strata scheme.  Things like:

• cleaning
• gardening
• insurance premiums and excesses
• utility bills - such as water usage, electricity, etc
• small 'day-to-day' repairs - such as a broken mailbox, a damaged or burnt out light, etc
• Owners Corporation and Executive Committee running expenses
• strata management fees (if a strata managing agent is appointed)
• auditing and tax return fees
• bank charges
• GST liability and other taxes

Top

Sinking Fund

The Sinking Fund, also under the control of the Owners Corporation, is essentially an emergency fund to pay for both expected (long term) and unexpected replacement, repairs and maintenance.  Some things, such as carpet replacement in stairwells, common property painting and the like are easy to budget for....but other things like 'concrete cancer' or 'structural damage due to subsidence or an accident' are very difficult to predict and therefore budget for.

Working out just how much to allocate towards these unexpected events is not an easy task and this is where the help of some experienced and knowledgable people is required to ensure the Sinking Fund does what it's supposed to.

In the not too distant past, it was very common for many schemes out there to avoid 'looking to the future'.  These schemes tended to minimise or even totally neglect their sinking funds to the eventual detriment of all the owners in the scheme.

Eventually, the time would come when something simply had to be either replaced or repaired but there were no funds in the sinking fund to do the job.  The Owners Corporation therefore had no other option but to raise a Special Levy asking for money to fix whatever had to be fixed.

TIP - It's always very sensible to allocate extra funds to the sinking fund to cover those unexpected repairs that will eventually turn up and usually at the worst possible times.  By handling the sinking fund properly, the owners of the scheme may never have to face the dreaded Special Levy - since sufficient funds should always be available - unless you are very unlucky and have a lot of unexpected events one after the other.

Now it's required....

Thankfully, due to increasing pressure from a number of areas, legislation was passed to 'phase in' mandatory 10-year sinking fund plans beginning from July, 2006 for all NSW strata schemes.  Essentially all NSW Owners Corporations now have to have 10-year sinking fund plans done for their strata schemes in an effort to eliminate the problems of 'insufficient long term capital works funding' - especially with the 'older' schemes.

The 'phase-in' schedule is as follows:

• Plan numbers equal to or greater than 50,000 - 1 July 2006
• Plan numbers equal to or greater than 30,000 and less than 50,000 - 1 July 2007
• Plan numbers equal to or greater than 10,000 and less than 30,000 - 1 July 2008
• Plan numbers equal to or greater than 1 and less than 10,000 - 1 July 2009

You can read the details about this requirement in the NSW Strata Schemes Management Act 1996: Schedule 75A - Owners Corporation to prepare 10-year sinking fund plans.

Another great reference document to have a look at is the NSW Office of Fair Trading's information page on Strata scheme sinking funds.  It covers some of the more interesting aspects regarding what happens if an Owners Corporation doesn't comply with the requirements and what concerned owners can do about that.  It also goes over the requirements for small schemes, otherwise known as 2-lot schemes.

ANOTHER TIP - you may like to explore (and possibly consider) the alternative of Strata finance loans to fund major works.  These loans can be a viable option if many owners don't like the idea of putting away cash for the future.  Have a look at the section below on 'Alternative ways to pay....'.

Top

Special Levies

A Special Levy is raised when there aren't enough funds in either the Administrative Fund OR the Sinking Fund to pay for an essential expense.  However, not all expenses are essential and many non-essential expenses can be postponed until enough funds are raised via the normal quarterly levy receipts.

Examples of non-essential expenses could be the painting of the common property's external walls, replacing the carpets in stairwells or adding extra landscaping to the scheme's garden area.  Conversely, fire safety compliance or repairing damage to the scheme's main driveway would be two examples of essential items.

No owner likes to be faced with a Special levy at any time so it's important to be aware that, eventually, there will be things that will need repairing or replacing and, if enough money hasn't been raised along the way, Special Levies WILL be required.

Special circumstance

In the instance where there IS enough money in the scheme's bank account to pay for an essential expense but the particular fund required to pay for the expense doesn't have enough money available, the Owners Corporation is permitted to transfer monies from one fund to the other.  Such a transfer results in a deficit in one fund that is covered by a surplus in the other fund.  However, this money must be repaid within 3 months by way of a special levy or a strata finance loan.

Top

---

Alternative ways to pay....

Many strata schemes, for a variety of reasons, may find themselves in the position where money is desperately needed to pay for essential repairs or renovations but the bank account is 'bare'.  Now, when this situation occurs there are a couple of options open to the Owners Corporation including:

• Don't do anything and wait till enough funds have been raised from future levies
• Raise a Special Levy so the works can be completed
• Raise the funds via a Strata Finance loan

While the idea of taking out a loan may seem abhorrent to many, it might just be the best solution to ensure the work actually gets done before a problem gets any worse possibly resulting in a 'cost blowout' due to neglect.

This sort of financing can also be used to pay for fund transfers (as mentioned in 'Special circumstance' above) and any unpaid levies (if this situation has become bad enough) allowing the scheme to remain financial while the debts are chased.  Once the debts are recovered the loan can be paid out.  Yes, interest on the loan must be paid but at least the necessary works are done and the dreaded Special levy is avoided.

Before you say "this loan thing is not for us" think about this for a second.....your 40-lot scheme needs $50,000 to upgrade the lifts and there's not enough money in the bank account to be able to pay for this.  What do you do?

• Do absolutely nothing and face a hefty fine for non-compliance or worse, face litigation if there's an accident involving the lifts and get the fine anyway
• Wait till you raise the $50,000 from the regular levies - which could take years, still leaving you exposed to any non-compliance and litigation risks until the lifts are fixed?
• Raise a special levy of $1,250 from each owner - and what owner would like to receive that bill?
• Have each owner pay $80 per quarter allowing the lifts to be upgraded immediately with the total cost paid off in 5 years?

Where did the $80 per quarter come from?

Well, I used a basic amortization calculator I found on the web (by typing 'amortization calculator' into google).  There are lots of calculators that come up so if you want to do some of your own calculations, jump on google and try out one.

Please note that I decided to use 10% for the interest rate (just to be on the conservative side) and a period of 5 years to pay off the loan but you can choose a lower rate and a different time period.

Anyway, based on a total loan of $50,000 over 5 years at 10% interest we get a quarterly payment of $3187 divided amongst 40 owners giving the $80 per owner per quarter.

Just in case you were wondering....the same amount using the same interest rate over 3 years results in a payment of $121 per owner per quarter saving about $5,700 in interest compared to 5 years.

Loans for strata are only relatively new but they are a very workable and not-too-expensive option for those schemes struggling to get all the 'essential' items done in any sort of reasonable time frame.  Plus, they allow the costs to be spread out over a number of years eliminating the need for that initial upfront payment shock for owners of having to somehow quickly find a large amount of money that many simply do not have.

There's a great article titled "Strata finance explained" on the NineMSN website in the MONEY Property section which gives a good explanation of how this handy facility can work.

Another good information resource on strata loans is one by Lannock Strata Finance called "About each strata funding option" which goes through the pros and cons for the different ways to fund a scheme's major works.  This page can sometimes take a little while to load so please be patient.

Top

---

Determining Levies

The Owners Corporation must determine what both the administrative and sinking fund levies will be for the scheme on an annual basis.  The amounts decided upon must be supported by a budget which must be presented at each Annual General Meeting.  All the owners can then vote to either accept or reject the proposed budget which must take into account actual and expected expenditure as well as the existing financial situation of the Owners Corporation.

The levy amount set is payable by every owner based on the unit entitlement of each lot.  Basically, the larger the unit entitlement of a lot, the greater the portion of the levy amount to be paid by the respective owner.

Levies are usually payable quarterly and a levy notice is issued by the treasurer of the Owners Corporation or by the strata managing agent, if one has been engaged to look after the scheme.

New Schemes

For brand new schemes the Owners Corporation must make its first determination of levies within 14 days from when the strata scheme is registered.  From then on, levies are generally determined at each annual general meeting as per all strata schemes.

NOTE - Initially, when a scheme is very new, it can be difficult to accurately determine the correct amount for the levies.  As time passes, there can be all sorts of expenses that suddenly appear because someone didn't think of them when the initial 'budget' was done.  This is, unfortunately, difficult to avoid.  So, for those of you involved in new schemes, be prepared for the initial levy amount to increase as a truer pattern of expenses begins to develop.

TIP - A professional strata managing agent, usually with many years experience in setting levies for new schemes, will probably get a lot closer to the true level from the very start.

The Early Days...

For a medium-to-large strata scheme, the time period from 14 days after registration till when all available lots are sold and settled can be the most difficult in terms of running the scheme.  This is because there may only be a couple of 'settled' owners responsible for the costs of running the entire scheme.  This is especially so if the real estate market is relatively slow and properties are difficult to sell.  Therefore, the scheme's original owner (usually the developer or builder) may still own a majority of the lots (until they're sold) and must therefore carry the lion's share of these costs.

The trend these days is for many original owners to provide what is called an undertaking to maintain the complex until enough owners are on board (ie until enough lots have been sold and settled) thus allowing the scheme to run under its own steam.  This way, the original owner isn't forced to pay out many thousands of dollars while waiting for sales to come through.  It also gives those in the complex time to see exactly what sort of costs will come up (that weren't originally accounted for) allowing the levies to be adjusted accordingly.

Usually too, a Strata Managing Agent is engaged very early on to oversee the scheme and ensure the original owner complies with any undertaking as stated.  It's very important the scheme looks pristine at all times to expedite any sales because the quicker the sales happen, the quicker the scheme can operate normally.

Top

---

Unpaid Levies

Believe it or not, there are still some selfish owners out there who simply will not pay their levies....but the laws are pretty watertight on levy payment compliance and the authorities frown heavily on those who default.

However, the road to 'recovery of the unpaid' can be a long one but eventually, especially if the defaulter is forced to sell their property, you will get all that's owed PLUS any costs you incurred along the way.  In the meantime, you just have to make sure your scheme remains financial until the defaulter is brought to justice.  Just make sure you don't give up the chase too early or too easily!!

Top

Interest Penalty

An unpaid levy gains interest at the rate of 10% simple interest a year if not paid within one month after it's due and, sometimes, this penalty is enough to bring the slow payers into line.  Many times too, a simple discussion with the offender(s) can result in the setting up of some sort of time-period arrangement allowing them to catch up over a number of months.

However, some others are either a little more stubborn (or desperate) and more forceful methods are needed.  Many strata managing agents have developed their own effective methods over many years of experience in dealing with these sorts of issues but, if your one of the 'self-managed' schemes, things can be a little tougher as you'll need to work out what actions you need to take to recover the funds.

To learn more about the various ways to try and solve the problem of owners who won't pay have a read of the Resolving disputes information page

Top

---

Extra information resources

Here are a few extra resources to help you understand levies even more along with some other relevant and important information that also might prove useful.

Information pages, booklets, publications

• Strata scheme sinking funds - obligations for 10yr plans
• Strata Living booklet: Refer to Levies section (about page 15)

NSW Strata Schemes Management Act 1996 references

• Sections 75 thru 80 - levy of contributions
• Section 149 - Order for variation of contributions levied
• Section 230 - Restrictions on OC levying contributions for expenses

NSW Strata Schemes Management Regulation 2005 references

• Regulation 8 - Levy Register

Strata Title Terms and Jargon

• Strata Terms and Jargon (to find out what everything means)

Top

What is strata?
Strata terms and jargon
Frequently Asked Questions
Do-It-Yourself Strata
Strataman News
Helpful Websites

Buying a strata titled property
Buying "off-the-plan"
By-Laws
Community & Neighbourhoods
Compliance issues
Executive Committee
Insurance requirements
Legal advice
Levies & Special Levies
Meetings
Ongoing maintenance&repairs
Owners Corporation
Preventative maintenance
Records & Accounts
Resolving disputes
Small & Large schemes
Strata Managing Agents
Strata trades guide
Taxation & GST

home page

Strata Jobs

Want to keep up with the latest news, trends and legislation in the world of Strata?

Then Register HERE  to receive Strataman News