Advice and Opinion

Reserve Fund implementation a ‘must’ for stability in the future

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“While most of the changes that have to be implemented in sectional title schemes according to the Sectional Title Schemes Management Act are administrative, the main one that trustees might find problematic in its practical implementation is the need to have reserve fund set aside for maintenance and repairs to common property”, said Michael Bauer, general manager of property management company IHFM.

The STSMA Sectional Title Schemes Management Regulations were published on the 7th October 2016, and according to this, sectional title schemes must set up their reserve funds with immediate effect. The reserve fund must be deposited into a separate bank account, and have a separate budget for the funds available. In addition, separate financial reporting will be required for this fund (a simple income and expenditure statement should suffice).

In Section 2 of these Regulations, it reads, “For the purposes of section 3(1)(b) of the Act, the minimum amount of the annual contribution to the reserve fund for, other than the financial year budgeted for at the first general meeting referred to in section 2 (8) of the Act, must be determined as follows:

(a) If the amount of money in the reserve fund at the end of the previous financial year is less than 25 per cent of the total contributions to the administrative fund for that previous financial year, the budgeted contribution to the reserve fund must be at least 15 per cent of the total budgeted contribution to the administrative fund;

(b) If the amount of money in the reserve fund at the end of the previous financial year is equal to or greater than 100 per cent of the total contributions to the administrative fund for that previous financial year, there is no minimum contribution to the reserve fund; and

(c) If the amount of money in the reserve fund at the end of the previous financial year is more than 25 per cent but less than 100 per cent of the total contributions to the administrative fund for that previous financial year, the budgeted contribution to the reserve fund must be at least the amount budgeted to be spent from the administrative fund on repairs and maintenance to the common property in the financial year being budgeted for.”

“What this boils down to”, said Bauer, “is that is now obligatory for each sectional title scheme to have 25% of their annual levy contribution set aside (broken down into an operating expenditure (opex budget) in a capital expenditure (capex) fund), which is what possibly should have been done in the past anyway. Having a reserve fund reduces the need to call for special levies when there are big ticket items needing replacement or major repair, e.g. lifts or roofs”.

“If schemes have less than 25% then they must top up the fund proportionately and if they have over the required amount they are in good standing. It is not necessary to continue to pay in 25% to the reserve fund each year, but rather that the fund must always be 25% of that year’s annual levy contribution. Likewise, if the levy budget increases, then the reserve fund must be increased proportionately”, he said.

“It might be difficult for owners to suddenly have to increase their levy contributions if they have not been planning for this requirement, but this will ensure financial stability in the future. This is a vital part of making sure that the scheme is kept in good repair with regular maintenance and possible improvements being possible,” said Bauer.