Financial insecurity in sectional title schemes can be caused by various factors.
Various factors can cause financial insecurity in a sectional title scheme such as cash flow mismatches, but if the managing agent or the trustees have contingency plans in place, the scheme shouldn't have financial difficulties.
This is according to Johann le Roux, executive director of Propell, who says that once these factors have been identified, they should be dealt with swiftly to avoid problems.
The causes are usually in the budgeting and planning within the scheme, cash flow mismatches where the levies aren't high enough and the bills amount to more than what is coming in, unforeseen repairs to items such as lifts or roof repairs, which can lead to high bills or levy arrears.
Le Roux says that all of the above have solutions and if the managing agent or the trustees have contingency plans in place, the sectional title scheme should not have any financial difficulties.
The different options are to have a reserve fund in place, to raise a special levy or apply for credit.
While a reserve fund is useful, there are pros and cons, says le Roux. The owners of the scheme may not agree to paying a higher than necessary levy each month purely to bolster the development’s reserve funds. Having a reserve fund puts the scheme in a strong negotiating position with service providers and the ability to draw funds helps the managing agent or the trustees deal with problems swiftly. However, there are risks of misuse and if a person sells his unit all the money he has put in is not refunded to him.
Le Roux says raising a special levy is another option when there are large projects to be undertaken, but this also has its problems. Collection of the special levy is difficult as many owners will not have the funds readily available (as in fixed income earners such as pensioners or those struggling financially) or they resent having to pay a large amount upfront. The benefit of a special levy is that only the correct amount needed is collected from the owners, and there is no surplus paid in unnecessarily.
The last resort is usually to apply for credit, but this can be the best for the sectional title scheme, says le Roux. The downside is that there will be interest and fees charged to the scheme but this can be flexible and put the scheme in a strong negotiating position with the service provider. This option makes a lump sum available and ready to be paid over for the services rendered. The system helps fixed income earners budget for a smaller amount added to their levy each month rather than one large lump sum as in the special levy.
Le Roux says that this is where a company that provides financing to bodies corporate like Propell, can step in and help maintain the financial health of a scheme. A finance facility for any eventuality is easy to set up, flexible and only incurs costs when used, he says. "The facility can remain in place indefinitely and the managing agent can do his job properly, which is to ensure the scheme is run efficiently."
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