Bodies corporate have to create a second savings fund to cater for long-term maintenance of a sectional title complex, which was introduced through the Sectional Titles Schemes Management Act (STSMA), Act no 8 of 2011.
In the past, many bodies corporate didn’t make sufficient provision – or any provision at all – in a reserve fund for major, planned maintenance needs. The underlying purpose of the STSMA is to force community schemes to save on an ongoing basis so the financial impact on owners is not as devastating as it is when special levies are implemented.
Are the calculations correct?
The question arises – do the managing agent and trustees of the body corporate who compile the budget of a body corporate really understand how to apply the calculations to determine the correct special reserve fund levy?
65% increase in levies
“A levy increase of 65% in a particular sectional title scheme would have been proposed, had we not analysed the budget and ten-year maintenance plan prepared by the managing agents,” says Meyer de Waal, a Cape Town based conveyancing attorney.
The managing agent presented a ten-year maintenance plan prepared by a professional house inspection company.
We did not have any problem with the plan as this can be a very comprehensive guideline for the trustees to consider when they compile the maintenance for their particular sectional title scheme, says de Waal.
In year one, the maintenance proposed for the property amounted to R47 000, which was a 65% increase on the proposed annual budget of R72 000, following the guideline and proposals of the property inspection report.
The managing agent’s proposal was to raise a special levy to recover the extra funds required as they initially budgeted R12 000 for the reserve fund levy.
Their solution was – “We can fix it if we raise a special levy”.
Not an open tap
Says de Waal, “Raising finance by means of a special levy is not a tap that one can open up if and when one feels like it. Special levies or additional levies have a severe negative impact on the finances of a home owner.”
“This led us to study the STSMA and we concluded that many sectional title management agencies and trustees of bodies corporate often do not understand how to interpret the Act and determining the special reserve fund levies.
Guideline and requirements
In terms of the STSMA, the following is prescribed:
- Less than 25%
If the body corporate reserve fund at the end of the financial year is less than 25% of the levy income generated during that year, the body corporate must provide for a reserve amount equal to 15% of the levy income for the new financial year
- Equal to or more
If the body corporate reserve fund at the end of the financial year is equal to or more than the levy income generated during that year, the body corporate is not obliged to make provision for a reserve amount in the new budget.
- More than 25%
If the body corporate reserve fund at the end of the financial year is more than 25% but less than 100% of the levy income in that year, the body corporate must make provision for a reserve amount equal to the repairs and maintenance items provided for in the new budget.
We did the calculations
For this sectional scheme, the proposed budget is R72 000.
If the reserve fund falls into category (A) above, then R72 000 x 25 % = R18 000. To comply with the Act, the body corporate must budget 15% of the levy income for the year to create the reserve fund. R72 000 x 15 % = R10 800.
Is not applicable as the reserve fund was nor equal or larger than the annual budget.
Category C can be relevant, if the body corporate would transfer funds from their existing savings account to the reserve fund and ensure that they have at least 25% of R72 000 in the special reserve fund available to add up to R18 000 required.
How much is required for a reserve fund?
The trustees only then need to cater for the expenses they agree should be implemented in the ten-year maintenance plan, equal to 15% of the annual budget as a minimum requirement.
Ten-year maintenance plan
Trustees can consider the ten-year maintenance plan prepared by the professional home inspection company and use such report as a guide. The trustees then need to work out a maintenance plan within the 15% budget allocation (calculated vs the annual levies).
Our views are, in this particular instance that the trustees do not need to raise a special levy to cover the R47 000 maintenance expenses proposed by the managing agent.
The trustees only need to cater for a maximum of 15 % of the annual budget.
For this body corporate, it will be 15% x R72 000 = R10 800 and not R47 000. This will avoid a special levy or a 65% levy increase.
“Sectional title property owners must ensure that their reserve fund levies are correctly calculated, and provision made for adequate long-term upkeep and maintenance of their investments,” says De Waal.