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"Just what DO you do when there's not enough money in the Sinking 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."

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.

If that's doesn't scare you then have a look at THIS from the company, Strata Finance.

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 sinking 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?

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.

Please note that I have used 12% for the interest rate and a period of 5 years to pay off the loan but you might like to work on a lower (or higher) interest rate and a shorter (or longer) time period.

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 being slightly higher or lower than those shown for each owner depending on their UE.

Remember - this is just a rough example as there will probably be some setup fees and the like as well. As these loans are UNSECURED, the interest rates are generally on the higher side.

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.  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 that many simply do not have (for a special levy).

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.

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 a dream to navigate to the various sections, so fear not!  One page I found particularly useful is a type of 'summary page' called Site Resources that cuts to the essence of strata financing and, best of all, it's simple and straightforward so anyone can follow it.  Good on you, Lannocks!  So make sure you drop by and have a good read if you're at all interested in strata finance options for your strata scheme.  Just about all you'll need is there - and once you read the topics covered you'll know what I mean.

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 handly later on as it covers a wide range of other useful topics

Here's a few more useful webpages I found on the Lannock's site.  If you focus on these you'll know everything you need to know about strata finance loans.  They even have a Video section for those of you out there that need to watch rather than read.  Just look for the Video menu item in the gray-coloured footer at the bottom of every page.

• Sitemap for Lannocks
• Strata Finance Videos
• Frequently asked Questions
• Some Case Studies

There's another specialist strata financier, Strata Finance, that also has some great and very helpful information on the ins and outs of strata finance.  They don't go into quite as much depth as Lannock's in some areas but it's still very worthwhile checking out.  The pages I found to be of most use were:

• Frequently Asked Questions
• How it Works
• Strata Financing Articles
• Latest News

Honestly, if after reading what's on these 2 sites and you still can't decide if this is somethng you would consider, then you NEVER will.  Just remember that these are not the only strata finance players in town so do your research and ask around.

Two others to put into your research pool would be:

• Macquarie Bank - Strata Improvement Loans
• Fidelity Finance Group - Strata Finance

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