Although the new Sectional Title Schemes Management Act (STSMA) now makes it compulsory for all schemes to have a substantial reserve fund to cover major maintenance and repair projects on a planned basis, there are many buildings and complexes where there is a need for upgrades right now but the available reserves are still insufficient to cover the cost.
“And the answer for such schemes”, says Andrew Shaefer, MD of national property management company Trafalgar*, “is a body corporate loan, which provides immediate access to the finance needed for urgent maintenance and capital projects – and enables owners to protect and even improve the value of their units”.
“The compulsory reserve funds are going to take several years to build up in many cases – and especially in buildings and complexes where the owners previously voted to keep levies down by dispensing with reserve funding. But values in these schemes will decline if repairs and major maintenance projects are deferred for lack of funds”.
“So the trustees will either need to raise a special levy each time they need to tackle a particular project, and try to save the additional funds that owners pay each month until they have enough to cover the work that must be done, or make use of a body corporate loan such as those which Trafalgar makes available, on favourable repayment terms tailored to fit the cash-flow constraints of their particular scheme.”
The two main difficulties with traditional special levy funding, he notes, are the fact that there are severe restrictions on where the funds can be invested while they are being accumulated for a specific project, and the fact that the cost of the project may well increase before the body corporate can pay for it.
“In addition, owner resistance to such special levies means that they are often difficult to collect and administer”.
“With a body corporate loan, on the other hand, the project cost can be settled immediately, and the value of the units in the scheme immediately restored or even enhanced – which also increases the willingness of owners to play their part in repaying the loan.”
Schaefer says there are many instances in which the improvements made by using body corporate loans have boosted the capital values of individual units by far more than the amount “invested” by each owner in repaying the loan.
“At one complex in Rembrandt Park, for example, the project cost was R4m and the indicative loan repayment cost per unit about R30 000. However the average resale cost of units in the scheme has already risen by R180 000 per unit as a result of the upgrade that was completed last year, and the owners are very happy with the outcome”.
“Similarly, in a complex in Pretoria West, the body corporate loan provided in 2015 was R650 000 and the indicative cost of the project per unit approximately R14 000 – but the results were also immediately apparent, which made the units in the complex much more attractive to potential buyers and resulted in the average value rising by R98 000 within 12 months”.
“Also in 2015, we provided a body corporate loan of R3,8m to a complex in Buccleuch where the repayment cost per unit was a substantial R41 000. But there was an immediate spike in the average unit value of R170 000, and once again the owners were delighted that they had decided to opt for the loan instead of a drawn-out special levy process.”