Financial trouble in sectional title schemes
Category Helpful Hints
04 Sep 2015
Financial insecurity in sectional title schemes can be caused by various factors and these, once identified, should be dealt with swiftly to avoid problems.
Hanekom says the last resort is usually to apply for credit, but this solution can sometimes be the best for the sectional title scheme.
This is according to Mandi Hanekom, operations manager at the sectional title finance company Propell, who says the causes are usually in the budgeting and planning within the scheme, cash flow mismatches, where the levies are not high enough and the bills amount to more than what is coming in, unforeseen repairs to items such as lifts, roof repairs, which can run into large sums of money, or levy payments in arrears.
Hanekom says all of the above have solutions and if the managing agent or the trustees have contingency plans in place there is no need for the sectional title scheme to have any financial difficulties.
The different options are to have a reserve fund in place, to raise a special levy or apply for credit.
Hanekom says while a reserve fund is useful, there are pros and cons to this. The owners of the scheme might not agree to paying a higher than necessary levy each month, purely to bolster the development’s reserve funds.
However, having a reserve fund does put the scheme in a strong negotiating position with service providers, and the ability to draw funds immediately helps the managing agent or the trustees deal with problems swiftly.
There are risks of misuse here, however, and if a person sells his unit, all the money he has put in is not refunded to him.
Raising a special levy is another option when there are large projects to be undertaken, but this too, has its problems, she says.
Collection of the special levy is onerous, as many owners either will not have the funds readily available, as in fixed income earners such as pensioners or those struggling financially, or they will be resentful of 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.
Hanekom says the last resort is usually to apply for credit, but this solution can sometimes be the best for the sectional title scheme. The downside to this option is that there will be interest and fees charged to the scheme, but this option can also 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. This 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 case of a special levy, she says.
Author: Mandi Hanekom, operations manager at the sectional title finance company Propell