Part 1, Deception
If you purchased your apartment in a modest sized new development you were probably aware there was a purchase price and an annual fee to cover running expenses for the building. It may have been explained that these expenses were to cover cleaning, paying for the man who fixes things and looks after the plants in the lobby, light and power for the common areas etc.
What would have been conveniently overlooked by the seller were the expensive costs of future foreseeable repairs ranging from a major repaint to replacement of the lifts. How do these get paid for?
The Victorian Owners Corporation Act, prior to recent amendments, protected buyers of apartments in buildings when the total levies reached $200,000 annually. The law required both a professionally developed maintenance plan and a plan to accumulate the funds to support it.
Less than $200,000 and beware - caveat emptor as they say in learned circles.
Later purchasers may have had some benefit from the “Owners Corporation Certificate” but even that has no requirement for longer term foreseeable maintenance costs to be revealed.
Part 2, A glimmer of hope
Despite the serious construction discoveries of our early years and the preparation for legal action, our property manager MIA proposed, and it was accepted at the 2012 AGM, that we should start a Maintenance Sinking Fund with an annual individual levy of $50.
This annual total levy of $2,800 was clearly insufficient and was soon increased to the total annual Maintenance Levy of $20,000 current up to 2021. We had been deceived but now there was an awakening - briefly.
It is fair to recognise that the demands of our legal issues, the complex investigations by specialist consultants and temporary repairs put the thought of a plan to support the new sinking fund well to the background, and there it has stayed until 2022.
An understanding of the special meaning of “sinking fund” is necessary. A shipping company could have a sinking fund to accumulate a reserve over a number of years to replace their oil tanker; another company may have borrowed a large sum to build their new factory and accumulates funds for repayment on the due date.
We have had a maintenance sinking fund since 2012 although “sinking” has been dropped from the name in later annual financial statements and the fund has been used for a different purpose.
A careful examination of these financial statements will show that all of the expenses charged against the sinking fund are costs related to our original VCAT related repairs, not charges that could be regarded as necessary because of careful preplanning and the elapse of time. Consequently there should be at least a notional Maintenance Sinking Fund reserve of $159,600.
In another paper Simpler financial reports the matter of confusing financial statements and an alternative way of accounting for unexpected expenses is discussed.
Part 3, Our new world of planned maintenance
Recent changes to the Victorian OC Act have changed the threshold for mandatory maintenance plans from $200,000 total annual levies to 50 units and now include our Owners Corporation. From our financial year starting on February 1st 2022 we can expect to have a new, properly compiled Maintenance Plan and the start of a supporting Maintenance Fund designed to meet the new requirements of our Act.
Your committee and MIA have engaged the services of an experienced company to examine our building and identify everything that can be seen to require repair, treatment or replacement at an estimated date in the future.
When preparing this kind of plan for a new building the quantity surveyor or appropriate specialist has the benefit of knowing that everything is at its start of life and the guides used to determine the timing and cost of sericing or replacement can be fairly used. When there has been ten years of use a physical examination and past experience becomes the basis for the plan.
The Owners Committee minutes for November 2021 propose that the Maintenance Levy be increased from the current annual $357 to $595. This seems conservative when the issue of ten years wear and tear is considered. The OC has also decided to make no allowance for any eventual major lift replacement. Could be bad news for a future buyer unless a lift replacement cost is added later. Part of the discussion in Simpler financial reports has a bearing on this.