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Protecting the funds

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Investment into sectional title is big business; laws and requirements ensure smooth operation of ventures.

When a diverse group of people make the biggest investment of their lives in a sectional title scheme – essentially a common property – it is vital to all owners the scheme’s funds are protected.

Various laws govern sectional title funds, but disputes can still arise between neighbours, often around levies, special levies and reserve funds.

Mandi Hanekom, operations manager of sectional title finance company Propell, says all sectional title schemes are obliged to have two separate funds: a day-to-day administrative fund and a reserve fund. The reserve fund, as prescribed by the new Sectional Title Schemes Management Act, covers major maintenance and repairs on a planned basis.

All money received by the body corporate must be deposited into an account with a registered commercial bank. The body corporate can invest excess funds, in which case the law says the money must go into a “secure investment” with a “financial institution”, both as defined by the Finance Services Board Act.

The body corporate must also take out insurance to cover the risk of loss of funds as a result of fraud or theft by a trustee, managing agent or employee. The Community Schemes Ombud Service Act says the minimum amount of insurance cover must be “the total value of that scheme’s investments and reserves as at the end of the previous financial year, plus 25% of the scheme’s operational budget for the current financial year”.

Paul French, commercial director Coastal Property Management Services, says the acts have brought added complexity to the administration of sectional title schemes. “For schemes to continue to attract strong buyer and rental interest, not to mention solid management and maintenance essential to retaining and growing property values, it is vital that property owners and bodies corporate are careful when appointing a managing agent.

The agent should have at least two to five years’ experience and good information technology and financial infrastructure; offer a full portfolio of services including maintenance; and be registered with industry bodies.

Andrew Shaefer, managing director of national property management company Trafalgar, says although all schemes must now have a substantial reserve fund, in some cases these funds will take years to build. This is particularly so where the owners previously voted to keep down levies by dispensing with reserve funding.

Shaefer says values will decline if major maintenance is deferred because of lack of funds. Trustees can raise a special levy for each project, but not without problems. Some owners resist, there are restrictions on where funds can be invested while they are being accumulated, and the project cost may increase.
Shaefer says a body corporate loan enables owners to protect and even improve the value of their units.

These loans can be made on favourable repayment terms tailored to fit the cash-flow constraints of individual schemes.

Shaefer says there are many examples in which improvements made using a body corporate loan have boosted the capital values of individual units by far more than the amount paid by each owner towards the loan.

He quoted last year’s case of a complex in Rembrandt Park, Joburg, where the project cost was R4 million and the loan repayment cost per unit was about R30 000.

“However The average resale cost of units in the scheme has already risen by R180 000 per unit as a result of the upgrade that was completed last year, and the owners are very happy with the outcome.”

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