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"Just what DO you do when there's not enough money in the Capital Works Fund to pay for those critical 'common property' repairs in your strata scheme?  Well, believe it or not, there ARE other options instead of forcing every owner to stump up big money for a special levy.  It's called Strata Finance and is something you SHOULD really consider if you find your scheme with this dilemma.  Make sure you read what I have to see on this growing industry."

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STRATA FINANCE & STRATA LOANS

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 money has been raised from future levies (not recommended)
• Raise a Special Levy so the works can be completed (not very popular)
• Raise the money via a Strata Finance loan

While the idea of taking out a loan may seem abhorrent to many, it might just be the best (and sometimes ONLY) solution to ensure the work actually gets done before the problem gets any worse and more than likely resulting in a 'cost blowout'.  Yes, interest on the loan must be paid but at least the necessary works are done, the dreaded Special levy is avoided and everyone is safe from harm.

Of course I haven't even mentioned the issue of LEGAL LIABILITY that comes into play if, heaven forbid, someone is injured (or worse) through the negligence of the Owners Corporation in maintaining the common property to a level that makes it 'safe'.

Now this is a really serious situation - one that I have personally witnessed and the end result, financially speaking, was a disaster for this particular scheme.  Let's just say the quarterly payment for all owners was a whole lot more than it would have been had they fixed the problem sooner rather than later.

This form of financing can also be used to pay for any special levies raised due to fund juggling - where money is transferred to and from the capital works and admin funds - as well as to pay for any unpaid levies (if the amount owing in unpaid levies has become bad enough).  Importantly, this allows the scheme to remain financial while the debts are chased.  Once the debts are recovered the strata finance loan can be paid out.

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 plus even more in penalties
• 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 $84 per quarter allowing the lifts to be upgraded immediately with the total cost paid off in 5 years?
  (see below for how this amount was calculated)

Where did the $84 per quarter come from?
Well, I used a basic loan calculator I found on the web by typing 'amortization calculator' or 'loan calculator' or 'personal loan calculator' into google.  All these terms came up with slightly different FREE options so, if you want to do some of your own calculations, jump on google and try out one.  But, if you're a tad lazy like me, you can try this FREE calculator - courtesy of Rate Detective.
Remember: Use of these free calculators will only give you an indication of your possible repayments.

Another good calculator is one you will find on the Macquarie Bank's Strata Improvement Loans page.  But, with this one you can't enter an interest rate.  You have to go with the current inbuilt interest rate - which is sort of OK as you'll know what you're probable interest rate will be when you enquire.

Also please note that I have used a very high 12% for the interest rate and a period of 5 years to pay off the loan but you might qualify for a lower (or higher) interest rate and a shorter (or longer) time period - which will affect the repayment amount.

I also haven't taken into account the Unit Entitlements (UE) of the scheme for each owner - which would result in the actual repayment amounts for each owner being slightly higher or lower than those shown - depending on their UE of course.

Please understand - this is just a rough example and is NOT to be used as a real estimate as interest rates and conditions and fees will vary on a case-by-case basis.  As these loans are UNSECURED, the interest rates are generally on the higher side.  Always consult a strata loan specialist before making any decisions.

Anyway, based on a total loan of $50,000 over 5 years at 12% interest we get a quarterly payment of $3,337 divided amongst 40 owners giving about $84 per owner per quarter for 20 quarters (i.e. 5 years).

Just in case you were wondering....the same amount using the same interest rate over 3 years results in a payment of $125 per owner per quarter - while the same amount using a 6% interest rate over 3 years would be $114 per owner per quarter.  Interesting isn't it? - please excuse the pun...

Loans for strata are a reasonably new alternative - and are seemingly slow to be 100% accepted by the strata community as a whole (probably due to a lack of understanding more than anything else) - but they ARE a very workable and not-overly-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 (for a special levy) 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.  It's a little dated I know (Nov 2006), but it's still quite relevant in a lot of ways and definitely helps you to understand what these loans are and what they can do.

Another great bit of Strata Loan info is on the Lannock's website so make sure you read this too - "How Strata Finance Works"

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Some Strata Loan Options

Lannocks

Lannock's, a Strata Financing Specialist, has a very helpful website that you simply must visit.  Have a good look around the site and thankfully it's easy to navigate to the various sections, so fear not!  One page I found helpful is the Frequently Asked Questions page that gives an adequate rundown on strata financing and, best of all, it's simple and straightforward so anyone can follow it.  So make sure you drop by and have a read if you're at all interested in strata finance options for your strata scheme.

Another good information resource (by Lannocks) on strata loans is a PDF called "The Do's & Dont's to Getting the Best Out of Your Strata Investment".  Pages 6 & 7 specifically look into the whole financing thing.  Interestingly Lannocks stopped displaying this PDF on its site in favour of some other information - which is still very good and easy to read - but I liked this so much I put it on my server so it didn't get lost forever.

Here's a small tip for you:  Make sure you save this PDF to your computer because it might just come in handy later on as it covers a wide range of other useful topics.  Just remember that this document was created well BEFORE the latest legislation and so some of the terms are the 'old' ones but the concepts are essentially the same.

Now, Lannocks is not the only strata finance player in town so do your research and 'google' around and luckily for you, I have already done this - but remember that things do change so you should do your own checking.

Some others to put into your research pool would be:

• Macquarie Bank - Strata Improvement Loans
• Strata Loans
• Finlease - Strata Loans

Macquarie Bank - Strata Improvement Loans

The information on this page is easy to follow and very straight to the point - which is great as no one these days has a lot of time to muck around.  Just make sure you have a play with the inbuilt Strata Improvement Loan Calculator which is pretty easy-to-use.  You can access it by following the link I just gave you or, alternatively, you can click on any of the other links on the Macquarie Strata Improvement Loans page - as they all take you to the same spot.  On this calculator page there's sections on BENEFITS (for either Lot Owners OR Strata Managers) and FREQUENTLY ASKED QUESTIONS which you should have a look at.  Everything you NEED to know about this type of facility is in there.

Strata Loans

Some more REALLY good information for you on the "strata-loans.com" site.  Have a look at What is Strata Finance? to get a concise summary of WHAT Strata Finance is.  Don't forget to look over the page on Why Use Strata Loans? for a great summary of the BENEFITS of taking out strata loans.  You'll just have to scroll down a bit to get to the meat.   And finally there's the Strata Borrowing - Your Questions Answered page for some hard-hitting facts on strata finance AND it's broken down into sections too: for Owners, for Strata Managers and About Strata Borrowing.  All really good stuff and so informative.

Finlease - Strata Loans

Finlease finances a lot of weird and wonderful things like helicopters and cranes and buses with strata being just one of the many options available to customers and this section goes over the strata finance portion of its business.  There's even the contact name AND phone number of the strata guy looking after this arm of the business AND a link to an application form if you're up to that stage...  Worth keeping in mind.

Honestly, if after reading through the wealth of information on these sites, you haven't decided one way or the other regarding strata financing, then you never will.

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Strata Title Terms and Jargon

If you need to know the meaning of one or more of the common terms mentioned above then have a look at the Strata Terms and Jargon Information page.

What is Strata?
Strata Terms and Jargon
Frequently Asked Questions
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