6 Indicators of a Body Corporate Levy Increase

One of the things I see often in body corporates looks something like this:

What this shows is that there has been a 50% increase in sinking fund budget from one financial year to the next.

Correspondingly, to try to offset the increase in sinking levies, the administrative levy has been reduced.

Which rather begs the question “If we can afford to trim $30K from our annual admin budget, how come we aren’t doing that all the time?” the answer to which will differ scheme to scheme.

What we’re looking at here is manipulation of the body corporate budget and it is part of the normal ongoing business of managing a body corporate.

This (mythical by the way) body corporate has suddenly decided to increase sinking fund collected. By reducing the administrative fund budget to offset the impact on lot owners an increase of 20% is reduced to an 8% increase.

The decreases in the administrative budget will come from trimming cost centres, which in the first instance is a paper exercise but will translate to delaying maintenance works or eliminating cost centres altogether.

It’s smart money management and significantly improves the chances of the majority of lot owners being able to meet the increase.

That said even an 8% increase is a significant rise in costs!

And the worst thing is its common as muck to see a major body corporate levy increase from one year to the next.

This article explores some of the reasons that happens.

Drivers of A Body Corporate Levy Increase

A body corporate levy increase will usually happen because of three types of scenario:

1. additional, unbudgeted expenses have come to light, or
2. funds have been consistently under collected, or
3. the scheme is embarking on a new project

All three situations result in more funds being needed.

Whether that’s a positive or a negative will depend on the circumstances and each lot owner’s personal financial position.

For instance a renovation project seems a great idea for everyone except of course the person who can’t afford to pay for it. But that of course shouldn’t stop everyone else from pursuing something that will improve the value of their asset.

And therein lies the dichotomy of body corporates; you offset costs by investing as a group, but by investing in a group you’re ruled by the decisions of the majority.

It would help enormously if you could see increases coming.

Here then are six everyday things that happen in body corporates which may indicate a future body corporate levy increase.

1. A New Sinking Fund Forecast is Commissioned

My mythical body corporate above is a perfect example of what often happens when a new Sinking Fund Forecast is commissioned, particularly if it’s been some years between reviews.

The body corporate suddenly finds out that projected capital works cost a lot more than they thought and they need to significantly step up collection of sinking fund levies.

Older buildings are particularly vulnerable to this sort of news.

A good example is balustrades. The Australian Standards for balustrades have become more onerous over time. Existing balustrades can be repaired but not replaced. A Sinking Fund Forecast that suddenly takes that into account will calculate a much higher levy that must be collected to meet the cost.

A new Sinking Fund Forecast may result in increased levies.

2. A Major Project Is Being Undertaken

I love renovation shows! I just love the whole transformation, of people as well as buildings.

If you’ve watched any of these shows you’ll know that it is usual to have cost over runs.

The problem is, once you’ve started, you really do need to keep on going until the project is complete, even if that means you need to do something extremely expensive in the process.

The same is true for body corporates as it is nifty elderly buildings.

Once you get started all sorts of costs over runs happen. For instance, painters might find concrete cancer that really needs to be repaired before the job can be finished. It’s surprising how often that happens.

Cost over runs need to be funded by owners which in a strata scheme means more levies.

3. The Building is Self-Managed

Let me preface this by saying I have the greatest respect for those who self-manage their body corporates. It’s a challenging job which many owners are performing well.

Most of the self-managers I meet really don’t like what they’re doing. It’s an enormous time sucker and they often feel out of control and overwhelmed by the sheer volume of work involved. Plus they worry about making mistakes.

Managing a body corporate’s records is stressful, time consuming and thankless. The reality is that these people are selflessly giving their time, at no or very little pay, for the benefit of all.

All Committees do that anyway, but for a self-manager the demands are so much larger.

To me it always feels like a sword of Damocles dangling over the scheme. The worst case scenario here is that the owner/manager finally has enough and abruptly quits or sells. A replacement needs to be found quickly and there isn’t always another volunteer.

Hiring a manager is the usual solution and that will result in significant levy rises. In the meantime enjoy the lower levies.

4. Legal Action is Instigated

Whenever the phrase “legal action” shows up in your minutes or a pre purchase strata report you have cause for worry. Legal action can and often is incredibly costly with very little result.

Which is not to suggest that legal action is a bad thing; sometimes it’s the most appropriate response to a particular set of circumstances.

From a financial standpoint however it is a big indicator of likely future costs, which for body corporates will translate to higher levies.

5. Deficits / Creditors in Body Corporate Funds

Body corporates rarely have creditors; the whole system of budgeting and collecting levies means schemes have cash to pay as they go. The same is true of deficits in funds.

Creditors and fund deficits are red flags, indicators of poor financial management. They don’t always spell doom and gloom but in most circumstances it means the scheme is under collecting levies.

For buyers it’s of particular concern because no one likes to be stuck with someone else’s debt and that’s essentially what happens if deficits hang around too long.

There is no way out of a fund deficit other than collecting more levies. Some schemes may ignore it or try and recover organically but they’re merely postponing the inevitable.

6. The Building Is New

Every body corporate, new or old, must estimate expected outgoings to set levies. That’s hard to do if the building is brand new and has no history on which to base estimates.

New building budget estimates are “best guesses” for the most part, tweaked a little to make the levies seem attractive to potential buyers.

The problem is that works around the scheme, and consequently the levies, are to a certain extent funded by the Developer and Builder as they go about fulfilling their statutory requirements.

Plus new buildings seldom require much in the way of maintenance, something that changes fairly quickly as the scheme becomes fully occupied.

The majority of new buildings hit a period where levies will need to rise significantly to meet costs.

These are indicators only

Each circumstance mentioned above is an indication only.

You might just stumble across a scheme who self-manages happily forever, or a building who runs a major project with incredible precision or legal action where the other party whips out their wallet with a minimum of fuss.

But, just in case you don’t, keep an eye out for these indicators a body corporate levy increase might be on the cards and adjust your plans accordingly.