Capital Works Funding Strategy
The Owners Corporation must have a strategy on how the Capital Works Fund will be funded. It is interesting to note that the legislation reflects that levies from lot owners are NOT the only way the Capital Works Fund can be funded and that the OC must consider the source of funding for any proposed work.
The sale of the common area is becoming a popular way to unlock the funds.
The main purpose of the OC addressing the Capital Works Plan at each Annual General Meeting is for the owners to consider the state of the building and the funds both available and needed in the years ahead. This can only add to the value of the strata properties in the scheme either in terms of appearance OR by a purchaser seeing there are sufficient funds to cater for future works. It's best that buildings are NOT left to deteriorate because, when large funds ARE required, it's possible that some owners may NOT be in a financial position to contribute towards the cost - and THAT can cause all sorts of 'flow-on' headaches.
Capital Works Fund
The Capital Works Fund, also under the control of the Owners Corporation, is essentially a large capital expenditure fund that pays for both expected (long term) and unexpected replacement and repairs of a 'capital' nature. This includes costly replacement and repair of the brickwork, windows, and upgrading electrical, plumbing, and fire equipment. Structural damage due to subsidence or an accident' is very difficult to predict and therefore budget for. Nevertheless, it is advisable to put some money away for the 'unexpected emergencies' that WILL crop up from time to time.
Working out just how much to allocate towards these unexpected events is not an easy task and this is where the help of some experienced and knowledgeable people is required to ensure the Capital Works Fund does what it's supposed to.
Capital Works Fund Plan
Before the current legislation came into force on November 30th, 2016, it WAS quite common for many schemes to avoid 'looking to the future'. These schemes tended to minimise or even totally neglect their Capital Works Funds to the detriment of all the owners in the scheme.
Eventually, the time would come when something simply had to be either replaced or repaired but there were no funds in the Capital Works Fund to do the job. The Owners Corporation, therefore, had no other option but to raise a Special Levy asking for enough money to fix whatever had to be fixed. Well - no more!!
Thankfully, the latest piece of legislation (NSW SSMA 2015 Section 80-OC to prepare 10-year capital works fund plan) goes a long way to help stop this damaging practice as the 10-year Capital Works Fund Plan MUST be prepared for a 10-year period commencing on the First Annual General Meeting. This plan details how any future major 'renewal, repair or replacement' works for the scheme will be funded and over what time frame - and the plan is the 'schedule' for this.
The Owners Corporation is responsible for creating, reviewing, and implementing this plan and a full review must be done every 5 years. The 10-year plan must be put in as an item on the Annual General Meeting agenda each year (for discussion and updating if needed). The money for expected works is held in the Capital Works Fund and comes from the quarterly Levies or the sale of common areas.
You might be surprised to know the value of the common area. In most cases, the sale of the common area can fund most if not all the capital works in the 10 year plan.
Get in touch with Warren Livesey from Buy Airspace for a complimentary 10 years Capital Funding Strategy focusing on the sale of your common space.