Advice and Opinion

Correct Levy Budgets are very important, says IHFM

The levy budget is one aspect of section title management where “shortcuts” should not be taken and particular attention to detail should be spent, says Michael Bauer, general manager of the sectional title management company IHFM.

While the Sectional Titles Act does not stipulate that the budget should be itemized, it is good management practice to include as much detail as possible.

“While a simply laid out budget does not necessarily make it wrong, it will create a lack of transparency,” said Bauer.

If, for instance, at the annual general meeting, the levy budget is presented with line items, e.g. accounts, audit, maintenance, but the maintenance amount is R500 000, the owners in the scheme would want to know what the amount was for, and an itemized breakdown of the overly large amount, he explained. The best way to compile a budget where one category could include a variety of items is to list what the amounts are for: pool, painting, building, plumbing, etc.

“While the budget might show the regular amounts that are needed every year for certain smaller items, there might be one very large project that is being budgeted for, such as a complete repaint of the exterior of the building and owners should be able to understand where their levies are going and question the amounts, if they feel they are too high”, said Bauer.

The most common items on the budget would be:

· Municipal services – water, electricity, sewage and refuse removal;

· Insurance – this is compulsory and the trustees must check that the policy covers the buildings and common property in full and is insured for its current replacement value;

· Maintenance for the current year – which will always be necessary and items should be planned in advance, on a general planning rota;

· Contributions to the maintenance fund for possible larger projects in the future – it is better to save for large items than to have to raise special levies;

· Bank charges;

· Administrative expenses;

· Audit fees;

· Contingencies such as burst water pipes or damaged entrance gates or booms;

· Managing agent fees,

· Salaries of ground staff, security; and

· Other services such as DStv, window cleaning, gardening services, etc.

Costs will also increase from year to year but not by a specific percentage, so it is better not to decide on a percentage increase but to assess the amounts item by item. From a transparency point of view, and for the trustees’ benefit (to be able to keep track of the finances properly), the trustees should go through the figures on a monthly basis, so that if for some reason or another the annual budget is reached before the year is up, they will realize there is a problem that needs to be remedied, said Bauer.

“The transparent reporting will also show the owners exactly what the levies are really used for, that they aren’t paying for a service, that they are actually sharing the operating costs of the whole scheme and every building’s costs will be different. Many mistakenly compare levies with another scheme but don’t realize that that building has a swimming pool and gym, whereas theirs’ might not, for example. Some buildings are new and some are old and would need more maintenance and upkeep funds, and so spend a lot more on maintenance and repairs than others.” he said.