Show me the money – funding major remedial work and renovations

Time marches on in strata, as in life. Our strata buildings are ageing and increasingly in need of some serious attention to maintain the quality of life for residents.

As the 2022 UNSW strata insights report pointed out,  the number of schemes in NSW more than 20 years old has exceeded the 50,000 mark. Every year, that number will grow and with it the number of owners corporations faced with major decisions about investing in their properties.

Some of these decisions may be discretionary, like whether to refurbish common areas and replace windows to give the building a fresher or more modern look.

But often there will not be a choice. Owners corporations and their office bearers have a legal obligation to repair and maintain common property. So, if the roof is leaking or the balconies are crumbling, the focus must be on how best to do it and how quickly it needs to be done.

Enforcement of owners obligations 

The law already makes it clear that doing nothing is not an option where common property needs repair or maintenance.

Additional measures to enforce this obligation are expected to be included in the next round of strata legislation reforms, based on a key recommendation of the 2021 statutory review. NSW Fair Trading will soon have the power to take the decision out of the hands of dysfunctional or paralysed schemes via a compulsory strata management appointment. 

The question that most vexes owners corporations, of course, is how to pay for major works. Some owners, particularly if they are also residents, just want the problems fixed and be more than happy to pay a reasonable contribution. But others, already struggling with rising living costs on multiple fronts, will push back out of legitimate concern that they simply cannot afford it at this time. 

Non-resident owners may also baulk at additional costs even if there is a compelling business case in terms of future property values and rental returns. That carries less weight if their unit is already tenanted long term and there are no plans to sell in the foreseeable future. 

Plan your project

Resolving these tensions takes time and can be stressful. Critical to a successful outcome is a clear and comprehensive project plan that complies with all current regulations, will be professionally managed and started with quotations that match the required scope from the kind of reputable builders and tradespeople who will see it through. This will reduce the risk of needing to go back to owners for more funds down the track.

In an ideal world, owners corporations will have anticipated future repairs and maintenance and built up a healthy capital works fund. But the cost forecasts in the capital works plan could be up to 10 years out of date. And we all know how much construction costs have escalated, particularly in the last three years. Then there are the new problems uncovered after the initial work starts.

Special levies

Any shortfall will need to be made up by the owners, usually in the form of special levies. These are voted on at a general meeting to raise funds for a particular purpose. Owners can be asked to pay up front in one hit – the latest strata law reforms reduced the notice required from 30 days to 14 days if funds are needed for emergency repairs.

More often, the payments will be added to quarterly levies to spread the burden over the time needed to complete the project.

Strata finance

To spread the cost even further, a strata loan can be an attractive option because it will allow owners corporations to pay for the project over a much longer period. It is important to understand that a strata loan is not a mortgage because it cannot be secured against common property. Interest rates and other costs can be higher but there are specialist lenders who will tailor packages to your needs.

However, it’s crucial for an owners corporation to weigh the implications of such financing options, as strata finance typically carries high interest rates. The decision to pursue a loan should be balanced against the potential benefits of accumulating necessary funds over time, thus avoiding the additional financial burden of interest payments.

We encourage owners to be sensitive to the capacity of their owners to fund their obligations and thoroughly investigate all options before embarking on any major works. Your Strata + manager can advise and guide you through the process and point you towards the right specialists who will help you achieve the best outcome.

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