WHY RESIDENTIAL PROPERTY INVESTORS NEED TO UNDERSTAND MAINTENANCE FORECASTS
There is no doubt that maintenance plans (also referred to as sinking fund forecasts or capital works plans in some states) have been of great assistance to property owners and investors within the strata community.
Our company, Leary and Partners, takes pride in the fact that we were the first professional firm to introduce the concept of accrued maintenance planning for strata buildings to Australia. This occurred in Queensland in 1990 and was in response to the needs of a large number of high-rise complexes that existed on the Gold Coast.
Prior to 1990 it was common practice for strata managers to make provision for accrued maintenance costs by using a nominal percentage of the administrative funds – usually 20%. Needless to say this was a rather crude guesstimate and frequently fell short of raising the actual funds required.
Property owners and investors rely heavily upon the information they receive from their maintenance plans to inform them regarding future common property maintenance costs. Investors understand when maintenance costs are not adequately provided for, a special levy is frequently required to meet the shortfall.
In the period prior to the introduction of maintenance plans, it was not uncommon for property owners to be forced to sell their apartments because they did not have adequate funds to meet unpredicted special levies. This situation can still occur and is why property investors and owners need to understand their building’s maintenance fund forecast.
Unfortunately there is no standard format for the presentation of a maintenance forecast. However they do contain similar components. They generally all show a summary of contributions and a list of expense items. They also generally show a chart that highlights the contributions together with the fund balance and the expenditure amounts on an annualised basis.
A good way to quickly get a feel for a maintenance forecast is to pick out the largest sums of money from the page containing the expense items. In most forecasts, the largest expense item will be the external painting. If your building has a lift then another of the largest expense items will be for replacing the lift components. Check to make sure this item is present. It is my experience that it frequently is not. This often occurs due to a misunderstanding regarding comprehensive lift maintenance agreements. These agreements may be comprehensive but they do not include for the final and inevitable replacement of the lift due to fair wear and tear.
In relation to the external painting, it can often be deceiving as to the true cost involved, particularly when there is only a small amount of paint visible. This is due entirely to the requirement for external scaffolding. Some buildings can be painted externally with the aid of a travelling scaffold. Other buildings on the other hand, require a fully framed scaffold for the full perimeter of the building.
There are many other factors that can have a material effect on the contributions required by each lot within the scheme, and they are frequently associated with large items of plant and equipment. These may include garbage compactors, stair and car elevators, pumping, air conditioning and ventilation equipment.
The other large maintenance related item that is frequently funded from the maintenance plan and is sometimes overlooked, is the refurbishment of common areas. As large residential strata complexes age, the owners often see the maintenance plan as a way of financing essential upgrades to common areas. These include pool and recreation facilities, main entrance foyers and upper-level lobbies.
Anybody who has invested in a residential strata property needs to familiarise themselves with the building sufficiently to understand where future maintenance costs are likely to originate. The maintenance plan is the financial device most likely to be relied upon to provide the funds. The more you understand its importance, the safer your investment will become.