Advice and Opinion

STSMA – the need for two body corporate funds explained

Property Finance Generic

The Sectional Title Schemes Management Act (STSMA) and the new Regulations within the Act now provide for two separate funds to be established for sectional title schemes.  These are the reserve fund and the administrative fund, and separate accounting needs to be done for each, says Michael Bauer, general manager of property management company IHFM.

The reserve fund is covered in section 3 (1)(b) of the STSMA, and this states that bodies corporate must establish and maintain a reserve fund with enough in it to cover the costs of maintenance and repair of all common property should the need arise. The suggested amount to be saved in reserve is approximately 25% of the year’s levy contribution for the scheme for the current year and if levies increase in subsequent years, the reserve fund must be adjusted accordingly.

“It is suggested, therefore, that levy payments in some cases would need to increase by at least 25% until the reserve fund is established, if it has not already been done”, said Bauer.

Prescribed management rule (PMR) 24 (5) states that money should be paid out of the reserve fund as per the maintenance plan that should be in place and the corresponding trustee resolutions, unless there is urgent repair or maintenance, such as a broken lift or roof leak, which cannot be foreseen.

“In the light of true transparency, any payment made from the reserve fund must be reported to the members of the body corporate as soon as possible, and payments must not exceed any restrictions imposed by the body corporate on expenditure from that fund”, said Bauer.

The administrative fund will deal with day to day management of the scheme, which is covered in section 3 (1)(a) and this amount must be enough to cover the annual operating costs of the scheme.  Items such as maintenance and management of the common property, payment of rates or other municipal charges, supply of electricity or gas and water, insurance premiums or any other payment obligation of the body corporate, such as a garden service, are all paid for via the administrative fund.

Again, there must be a trustee resolution as to how much this fund pays out for each item and this will be according to the annual budget which would have been established at the beginning of the year, and approved later at the AGM.

“It is good practice to have two separate funds and most bodies corporate have been operating in this way for quite a while before it became regulatory to do so, but those who have not must get their funds established as soon as possible, as this became compulsory as of last year,” said Bauer.