1. Where your money should be spent – save or spend? | Owners Corporation Network

1. Where your money should be spent – save or spend?

“The building facilities and amenities have had very little money spent on them in the past 7 years. Many facilities are in a state of deterioration and disrepair. The function of an executive committee is not to horde $1million of owners’ funds in bank accounts, but to judiciously save your levies to invest them in increasing the capital value of your common property.” [extract from actual executive committee campaign letter]

Situation:The words above were part of a response by a group of owners to an incumbent chair’s criticism of their campaign to vote him and the existing executive committee out and to spend some of the sinking funds on upgrading the building. The $1 million of funds sitting in the bank was a commendable achievement by the existing executive committee – but the building’s common areas and facilities were in very poor condition. The building was in a very desirable part of the city, and the apartments were large and generally well built. So it was well worth significant investment and upgrading.

Outcome:The incumbent chair and executive committee were voted out at the annual general meeting by almost 80% of all the owners. The newly voted in executive committee decided to spend almost half the scheme’s funds on a range of improvements including

  • state of the art gym equipment ($100,000),
  • renovating the gym and games rooms carpet and painting ($50,000),
  • remodelling the lobby reception area, flooring, wall panelling, reception desk, walls, paintings, balustrades and carpet – including moving the mail boxes from the reception area into a secure room ($150,000),
  • replacing the long non-functioning steam room with a sauna ($15,000),
  • converting an unused storage room into a comfortable conference room available for residents use ($10,000),
  • replace the failing 15 year old roller door with custom designed steel gates ($35,000),
  • upgrade the security system and cameras ($15,000),
  • install satellite dishes and re-wire the building to provide almost 30 free international satellite channels ($15,000),
  • re-render the crumbling walls, sand the wooden floor and improve glass viewing panes of the internal squash court ($15,000),
  • repaint the parking entrance, loading dock and parking lift areas. ($10,000)

Total spend of approximately $420,000. After 1.5 years these renovations were all complete.

Learnings:

The building now has a modern, premium and ‘kept’ feel, with beautifully presented common areas in use regularly by occupiers. Local real estate agents are delighted and sales indicated that property values and rentals have increased by up to 10% or more in a flat market.

So, assuming an average initial value of $600,000 per lot in a 115 lot building, an investment of $3,600 per lot returned a capital increase of likely up to $60,000 per lot. As well rental returns, community and living amenity were also vastly improved.

Investing sensibly in common property can provide far larger investment value increases for lots than lot owners could create by investing in their individual lots. The investment cost is also spread amongst all lot owners.

Consider, no matter how much an individual lot owner invests in their own lot if common property is not up to standard then their lot will not be worth what it should be. In fact, owners are unlikely to spend money on their apartment if the common property does not meet a certain quality standard. It becomes a vicious circle, with low investment in the common property leading to low investment in the lots, leading to low incentive to invest in the common property and general deterioration in many aspects of the scheme and building.

It is as much as false saving to under-invest on common property as it is wasted money to over invest. For example if these renovations used up all of the $1M of funds then it may have been too large an investment to make within such a short time period. As it was many owners and executive committee members contributed their skills and many hours to get the best plans, quotes and designs for the lowest prices.

It is a point worth making that when you buy into a strata you also buy the lot’s unit entitlement ratio part of the sinking fund, when you sell out you also sell that part of the sink fund. This has been known to trigger a sell out when the sinking fund is low. Owners would imagine that a low sinking fund will need to be built up again and that they will have to contribute more to this build up than if the sinking fund was high. But a well managed building will often have periods of low and high sinking funds above a consistent levy base. As long as there is a sensible long term plan for what needs to be spent on the building plus contingencies, then levies should be at a level where they do not have to rise up or down as the sinking fund varies. They can stay constant and money spent at the time it is planned.