Sinking fund changes its name and a lot more

CAPITAL WORKS FUNDS

It all changed 30th November, 2016

What exactly are the new requirements for Capital Works Funds and what does a compliant one look like? How do you best communicate the changes and the need for CWFs to apartment owners? How does it affect developers and how does construction costs drive maintenance needs? Why the heck do we need them anyway? And….. how do you get the most of your CWF?

What’s changed?

The days of getting a quick and dirty Sinking Fund Plan and ignoring it are over. The new legislation (the Strata Schemes Management Act 2015 s 80) states that a CWF must include:

• "Plan of anticipated major expenditure ... over the 10-year period’ ; and

• For the first time, the law is specific about what a CWF must contain Must include:

• Details of the work

• Timing and anticipated costs

• Source of funding ; and

• Any special inclusions you want

A CWF now MUST be implemented!!! Which means…

Owners can no longer ignore a report’s recommendations and under-fund a Capital Works Fund account. There is also a requirement the report accurately represents what is required for the buildings major costs maintenance needs which mean the days of using the cheap and nasty tick and flick report writers is over. These reports will no longer be filed and ignored so report quality is king.

How does a quality CWF Benefit owners?

A CWF is in effect a budget and it can make the cost of unit ownership transparent. How?:

• It sets a budget for the predictable costs of maintenance and replacement; which if properly applied, eliminates almost all special levies (especially in building under 20 years old)

• It helps new owners clearly know the costs of strata maintenance; and

• Ensures a user pays system.

Is Australia the only country where a CWF is required?

The concept is Australia and was first introduced in 1997 many jurisdictions around the globe have mimicked the concept including most Canadian provinces from 2000,no less than 32 US states, Dubai in 2009, NS in 2010 and south Africa has legislation pending.

Each jurisdiction has separate requirements while with no uniformity. Some use the percentage of the administration fund as a basis for capital works budgeting while some require each item to be funded individually. The cash flow model used in NSW is, based on our research, the most efficient funding model to meet building maintenance expenses.

What’s the make-up of building construction costs and how does the CWF fit?

CWFs are all about building maintenance and building maintenance starts with architectural and engineering decisions before and during construction.in most modern building, the superstructure which makes up 1/3 of the building cost which if kept sealed from the elements (usually with an external coating) has an indefinite life while the finishes, plant and equipment, which has finite Lifespans make up 2/3's of the cost

Maintenance cycles of buildings

A brand new shiny building starts a cycle of maintenance. Here's what you can expect:

- 3 months to 2 years- minor construction defects

- 2 years- initial maintenance free

- <6 years- short cycle items/ high use – pumps, motors, etc

- +7 years- major maintenance costs - paint, carpet, some fire equipment, etc

- 18-20 years- major refurbishment costs - Major plant like lift motors, fences, intercom, failing retaining walls, roof and gutters, etc

lt Affects Developer Too…

Developers will be required to set realistic levies from when the strata plan is registered up until when the developer has sold at least one third of the unit entitlements in the scheme (the initial period) and for the subsequent year after.

So what does a good CWF plan look like?

lt contains a precise list of expenses, with timing included. E.g. replace water pumps, $4,218 in three year’s time, $4,766 in seven years, $5,385 in eleven years etc. lt clearly shows the source of funding –

• E.g. 'capital works will be funded from the capital works fund

• Levies - show levies per unit entitlement

• Other E.g Sign/cell tower income

• Lending if required

It is Tailored to the building in all ways including taking into account:

• Age

• Type of construction

• Environment

• Construction technique

• Recent sinking fund expenditure

• Existing Issue/ defects

Four RULES on how to get the most out of your CWF

1. GIGO (Garbage in Means Garbage out) – Supply your CWF reporting company with as much information as you can about the building and maintenance history

2. Use the TWO WEEKS after receiving a CWF plan to review and give feedback immediately so the inspector still has your building in his recent memory recall

3. Read a CWF Plan cover to cover – (yes I know – good for solving insomnia) and/or invite your pro into go through it with strata managers

4. Talk worst case scenarios to your executive committee – people are getting sued over not budgeting properly, adhering to CWF recommendations. Saving pennies today will likely cost dollars tomorrow in risk and higher maintenance costs.

In summary…

For the first time CWF must be implemented. There are many compelling reasons to get a foods quality one. For the first time strata managers may have liability if the report proves inadequate. Everyone is affected including developers. So find quality providers and when you get a CWF, read it, work with your provider to get the style and content you want and apply the recommendations/ That’s it….all sorted. Easy!!!