HELP - Capital Works Fund

Discussion in 'The Buying & Selling Process' started by Cudareli, 26th Apr, 2018.

Join Australia's most dynamic and respected property investment community
  1. Cudareli

    Cudareli Active Member

    Joined:
    18th Sep, 2016
    Posts:
    31
    Location:
    Sydney
    Hi,

    I've recently put a holding deposit down for a unit in a small apartment block of 6 units. The block is small, 2-stories and is well maintained. The strata is currently advertised at $550 per quarter.

    During the cooling off period I have obtained a strata report and the strata levies have come back in at $1,300. There are no documented structural issues with the building nominated in the strata report, however a loan was taken out by the strata to pay for a new retaining wall that was failing at the rear of the property. This has almost been paid off now and I have an email from strata manager stating that the strata will drop to around $500 once this has been paid off.

    My conveyancer has said that this should have been dealt with by a special levy, not by increasing the strata fees. He has said that there is no guarantee that the strata will revert back to $500 once it has paid off. He has also said that the $11,000 odd in the capital works fund is too low and that I should stay away.

    I'm not asking for anybody to tell me what to do, but just wondering what peoples views are with this. Has anyone experienced anything similar? What confuses me is that people always suggest buying into small complex's with low strata fees, then when I find one, I get told the strata is too low and should be higher.

    Based on what my Conveyancer is telling me, I best steer clear of small blocks as when something goes wrong, there aren't enough poeple contributing to paying it off.
     
  2. Scott No Mates

    Scott No Mates Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    27,101
    Location:
    Sydney or NSW or Australia
    Low levies are a furphy.

    Strata loans are common to allow capital works however the loans are p&i and must be repaid. They're an alternative to larger special levies and are spread over several years.

    How much are the additional repayments on the strata loan? These will finish when the the loan has been repaid.
     
    bunkai likes this.
  3. Cudareli

    Cudareli Active Member

    Joined:
    18th Sep, 2016
    Posts:
    31
    Location:
    Sydney
    The strata was previously at $500 a quarter and have now been lifted to $1,300 until the loan is repaid in October 2018. The strata manager has written an email advising that the strata will reduce to approx $500 perp quarter once it's been paid off, however the Conveyancer is saying that email is useless and can't be relied upon. My conveyancer is saying that he's never seen strata reduced once it's been raised.
     
  4. bunkai

    bunkai Well-Known Member

    Joined:
    26th Jun, 2015
    Posts:
    858
    Location:
    Sydney
    It almost certainly should be quite a bit more than $500.

    You should be looking at the capital works or sinking fund plan and the likely works required over the next ten years. Then you can work out what you might be up for.

    The fact a strata loan was taken out is a bad sign. Not bad enough to stop the purchase but one to be aware of. The are very expensive and it is horrible to be paying off PAST capital works.

    I understand you can structure it such that specific owners can pay up front though it is still a liability for the OC.
     
    Last edited: 26th Apr, 2018
  5. Cudareli

    Cudareli Active Member

    Joined:
    18th Sep, 2016
    Posts:
    31
    Location:
    Sydney
    Thanks for your help on this.

    I've had a closer look at the strata report and the 10 year capital works plan. The capital works contribution to strata is something that I am comfortable with, it is anticipating that in 2030 I'll be paying around $650 a quarter in capital works which is reasonable.

    The big mover has been the admin fee portion of the strata that doubled in cost at the last strata meeting. The agent has said that it's all related to paying the loan off which has now occured, however there is limited information to confirm that.

    I don't want to make the wrong decision, but at the same time, I worry that this has just gone in the 'too hard basket' for the Conveyancer.
     
  6. Scott No Mates

    Scott No Mates Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    27,101
    Location:
    Sydney or NSW or Australia
    On what basis would the higher levies continue to be charged? Inadequate sinking fund? Future capital works in the 10 year budget?

    If there's no legitimate reason, what will the money be put towards?
     
  7. bunkai

    bunkai Well-Known Member

    Joined:
    26th Jun, 2015
    Posts:
    858
    Location:
    Sydney
    If you can get a copy of the detailed admin budget showing YTD actuals, current year budget and last year budget it would give you a better idea of movements. This is stock standard and a (dated) copy will be in the last AGM documentation.

    Seeing a copy of the statement of account for the strata loan would also mean you can verify what you are being told. Again, you would hope to see this in the AGM docs.

    I'm not sure this the role a conveyancer and maybe they are just giving you their perspective. There are strata reports but you seem to be on the right track .
     
    Cudareli likes this.
  8. Cudareli

    Cudareli Active Member

    Joined:
    18th Sep, 2016
    Posts:
    31
    Location:
    Sydney
    The capital works plan deals with building back up the sinking fund.
     
  9. Cudareli

    Cudareli Active Member

    Joined:
    18th Sep, 2016
    Posts:
    31
    Location:
    Sydney
    I've read all of that stuff, still tough to see what's going on.

    I can see that a special levy was raised to pay out the remaining $38k of the loan. Then at the same time, the admin portion of the strata doubled.
     
  10. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

    Joined:
    18th Jun, 2015
    Posts:
    23,319
    Location:
    Sydney
    $550 a quarter is very low. Basic mowing, edges, gardens and cleaning. Let alone building insurance and rates. And that before any real maintenance or enhancements (sinking / special levies). The borrowing says as much that they are running too thin.

    That said if there are no evident major defects whether you are asked to pay a catch up or they hike the strata they are both the same issue. In your mind if there arent major unfunded defects perhaps getting involved with the Committee as owner may assist. Its possible two or three oldies run the strata and would rather pay less. But that ignoring reality and in time the place mike become costly as issues mount. May be better if you paid a higher levy and build up the funds than leave it unfunded.
     
    qak likes this.
  11. qak

    qak Well-Known Member

    Joined:
    1st Jun, 2017
    Posts:
    1,671
    Location:
    Sydney
    Seems too low still ... if that's the "capital" (sinking fund) what's the admin fund contribution estimated to be?

    Is it possible that gardening & other maintenance around the block is being done by owners at no cost - what will happen if they move on?
     
  12. Propertunity

    Propertunity Well-Known Member

    Joined:
    19th Jun, 2015
    Posts:
    3,476
    Location:
    NSW
    Special levies often cause older people to sell because they cannot fund it with their own cash or borrowings as a senior.

    I've seen plenty of strata fees drop back once special works are completed or funds raised for court cases, now settled.

    This is almost $2K per unit in cash. Having purchased dozens, and dozens, and dozens of units for clients I can tell you this kind of balance is pretty common. Strata fees are more usual to be $800-1200 per qtr now due to insurance premium increases over time and the requirement to have a 10 year plan to spend.

    If you "stay away" for this reason, you'll never end up buying anything.
     
  13. qak

    qak Well-Known Member

    Joined:
    1st Jun, 2017
    Posts:
    1,671
    Location:
    Sydney
    Without knowing what's covered by the current levy it is a bit hard to have an opinion.

    And I'm confused anyway - was the loan paid out with the $38K, or is it still to be paid out and that's why the levy will stay at $1300 until October?