Advice and Opinion

Budgeting in sectional title schemes

As prescribed by the Sectional Titles Act, budgeting in sectional title schemes is usually done on a yearly basis by the trustees but it is better to take a five year view and plan accordingly, says Johann le Roux, executive director of Propell.

A common mistake made is assuming that all the owners will pay their levies, and while most people do pay there are always cases of non-payment, said le Roux. If the average of non-payers is applied, then trustees should actually add 6% to the budget to compensate for non-payers.

Ideally, budgets will be established by going through the past three years’ financials before deciding what the figures should be. It is important to know the history of the building to establish what special maintenance projects were done in the past.

This allows for proper medium term planning of special maintenance expenses.

There are some maintenance projects that could be postponed but any maintenance that carries a risk of insurance being cancelled must take priority, for example, if it is found that there are structural cracks caused by bad foundations, this needs to be dealt with immediately, he said.

Any special project that is planned must be included in the budget as well as the source of the funds for each particular project.

When determining what the income and expenditure of the sectional title scheme might be, it’s advisable to treat the body corporate as one would a business, said le Roux. Consider what the municipal bills could come to if they increased significantly at some point during the year and what that would do to the cash flow. A budget should also differentiate between normal levy income, special levy income and other sources, if any.

Expenses can mount up quite quickly in sectional title schemes and it is important to consider the general and special maintenance, which must be broken down in as much detail as possible.

In each budget, provision should be made for a reasonable payment towards a fund to cover future expenses for periodic maintenance (which is required by the Act). Each expense could be increased by a certain percentage which is line with what the current increments are. It must be kept in mind that Council charges to consumers might increase by more than budgeted for and so could electricity go up by more than what was initially agreed on.

“On looking at 31 different bodies corporate financials, the expenses increased by an average of 11,98% each year, so it would possibly be reasonable for the trustees to budget on a 12% increase in many cases,” said le Roux.

To keep a sectional title scheme financially healthy, he said, there should be a reserve fund in place that is enough to carry it for three months of normal expenditure. If the budget shows that there is an exact match between income and expenditure, then there is a risk that an unforeseen incident could place the scheme in financial trouble. A reserve for expenditure is not however, to be confused with reserve funds that are earmarked for specific maintenance projects.

The financial year would usually run from 1 March each year to the last day of February in the following year, but it is prudent to expect that the AGM might be delayed and include a resolution approving the budget with a set increment for the months leading up to the next meeting, advised le Roux.

“Overall, keeping the financial situation of your sectional title scheme in a healthy state is what is needed and careful planning and realistic budgeting will ensure that the scheme’s monthly obligations are met throughout the year.”

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