How much should be in a body corporate sinking fund? $50,000, $100,000, or $1 million? As, with most things in body corporate the answer depends on several factors.

What is the Sinking Fund for?

A sinking fund is a capital works savings account. In NSW it’s referred to as a capital works fund but it’s the same thing.

Day to day management of a body corporate is paid from the administrative fund. Capital works are paid from the sinking fund.

For instance, checking the roof and cleaning gutters is an administrative fund expense. Fixing a roof leak identified in a roof inspection would be a capital expense.

Each body corporate (except those registered with 2-lot regulation module) is required to raise a sinking fund contribution each year to collect a little from every owner to save for future capital works. Those funds are to be saved and spent on capital maintenance and improvements.

At any given point in time a scheme should have capital funds available. Indeed, how much is in the sinking fund forms part of the value of the body corporate and by extension each individual lot.

How much should be in a body corporate Sinking Fund?

When it comes to capital savings, how much is enough? Unfortunately there’s no easy answer. Its a bit of a “how long is a piece of string” situation.

Buildings differ from each other significantly, even if they look the same. There are a lot of factors that impact including:

Size, configuration, and location

A large high rise with hundreds of lots is going to have a larger sinking fund. Or a small block of three units is going to have way less in capital requirements. Owners in both buildings may pay roughly the same in sinking fund contributions but the total capital accumulated will look completely different.

Along with the number of lots included, the configuration or type of body corporate, and location also needs to be considered.

A high rise is more complicated than a townhouse development but a townhouse complex has more geography to consider.

Several different towers in a large block will have different capital needs that one tall tower.

A beach front location has different requirements than the same sort of building in the middle of the city.

Facilities

Just as the general size, type, and location of the scheme matter, so too do facilities.

A building with a basement car park will have more capital needs than one with no underground features.

Items like pools, gyms, roof top areas, BBQ’s or even just a field for kids and animals to play in are all common property facilities and will all require capital works at some stage.

Age

The age of a building or body corporate is important information.

New buildings will not require much capital work. Well … unless they have construction defects, but that’s a whole other discussion.

Older buildings will require much more capital work as elements such as lifts, waterproofing and balustrades begin to fail and need replacement.

The age of a scheme and likely future requirements play a big part in capital planning.

Condition

This is where engagement and efficiency of the elected committee becomes crucial. A building that’s been proactively maintained over its life is going to have less capital requirements than one that’s had reactive works when something broke.

The time between identification of any problems and their subsequent rectification is another strong factor in how expensive any particular fix is likely to be and demand for capital funds.

Other factors than maintenance also impact. If the building was in the path of a major weather event it’s more likely to require more capital investment.

Timing

When capital funds are needed is a big factor in working out how much should be in a body corporate sinking fund.

A good example is exterior repainting. Its a crucial part of the waterproofing the building and should be carried out every 8 – 12 years depending on external factors like a marine or inner-city environments.

If the building was painted last year, then you’d expect the sinking fund to be depleted. The designated works were saved for, are completed, and the savings cycle is starting again. Great. In this case a low sinking fund balance is normal business.

If the building hasn’t been painted in 12 years and there isn’t much in the sinking fund this is reason for concern. Major works are required soon when there are insufficient funds which is a condition ripe for special levies.

Sinking Fund Forecasting

There are a lot of factors that determine how much should be in a body corporate sinking fund. Far too many reasons for there to be a single “rule of thumb”. Each scheme is completely individual, down to what has happened recently or what is pending.

To overcome these issues the BCCM Act 1997 requires a Sinking Fund Forecast be prepared for a body corporate registered with Standard, Accommodation or Commercial regulation module.

That Sinking Fund Forecast must predict capital requirements for the current year and next nine years into the future. The body corporate is essentially creating a benchmark against which to measure performance.

The best way to work out how much should be in a body corporate sinking fund is to compare the current capital savings noted in the current financial statements against the expected balance for the same timeframe in the Sinking Fund Forecast.

Best case scenario the scheme has saved roughly what its expected to save. Assuming works have been carried out as scheduled this is a strong capital position.

If capital savings are less than expected, that doesn’t necessarily mean things have gone wrong but it will require more investigation. Have they been collected contributions at the level suggested for planning? Lower contributions collected is the most common cause of capital savings shortfalls. This is a risk factor for higher sinking fund contributions moving forward or special levies when works are required.

How to Get Documents

Obtaining the documents is not difficult and any buyer or owner is an interested party and may access body corporate records.

Body corporate financial statements will be included in the Form 2 Seller Disclosure Statement for the lot if you are buying. If you are an owner you should be able to get financials from the portal if you have one or contact the strata manager.

Getting a copy of the Sinking Fund Forecast is more problematic. If buying in the first instance, ask the agent or seller for a copy. If that doesn’t work, much like owners, contact the strata manager for the scheme and discuss with them.

Or alternatively, hire us to carry out an inspection of records and report on your behalf.

Thanks for reading. If you have any questions or there is something you’d like to hear more about please leave me a comment! My next article will be what is in a Sinking Fund Forecast and what it means.