Sinking Funds | GQS
SINKING FUNDS: Protecting th Value of your Property Investme
Do you understand the mechanics of your sinking fund? Many of us contribute hundreds, or thousands, of dollars sinking fund within our body corporate fees each year. But why, what is this for? How do we know it is being app and doing what it is supposed to? How does it protect the value of our investment? How do we accurately foreca
Firstly, what is a Sinking Fund?
Nearly all bodies corporate require a formal sinking fund to be set up (except for specified two-lot schemes). A sinking fund must allow for raising a reasonable capital amount from Owner’s contributions, to provide for necessary and reasonable spending relating to replacement, repair and/or maintenance of the property’s capital items. The law requires a sinking fund budget to consider the current financial year, and also the reservation of an amount to meet likely spending for at least the next 9 years. For example, these funds could be used towards, re-painting, repair/replace roofs, gutters, and downpipes, repairing or replacing components of the lift, replacing fencing etc. Appropriate budgeting and planning reduce the likelihood of special levies which typically become a serious burden on lot owners. It also ensures the body corporate has sufficient funds to maintain the level of amenity and quality of the property, which without can seriously affect re-sale when potential purchasers search body corporate records. If a Purchaser identifies that the property is in dire need of a re-paint, but the body corporate records show the sinking fund has a low balance, or shows a substantial future increase in levies, will they likely proceed with the sale at the desired price?
To ensure the Sinking Fund is being appropriately managed and doing what is intended, a professional Quantity Surveyor (QS) is engaged to complete a Sinking Fund Forecast. As the law calls for the budgeting of future works, it ensures bodies corporate are always looking ahead regarding future capital works. This is so that the sinking fund budget can accrue and have sufficient funds leading up to the required work. Unfortunately, 10 years (current and next 9 years) is not looking far enough into the future, many major works items worth considering may have a useful life greater than 10 years. It has become industry standard that your sinking fund forecast will include a 15-year forecast period so that the body corporate gets a 5-year shelf life out of the professionally prepared report, whilst still complying with the legislative requirement of budgeting for the current year and 9 years into the future. It is however still prudent for your QS to consider works required outside of the 10 or 15-year forecast period to ensure the body corporate funds are not left short in the future.