FINANCE OPTION OUTLINE

HOW BODY CORPORATE’S CAN FINANCE REMEDIAL BUILDING WORKS AND REQUIRED BUILDING MAINTENANCE

As buildings age (like most things), they need work.

There comes a time in every building’s life cycle where that work is more than cosmetic. It is structural, and with that comes significant costs.

Bodies corporate are generally very cost-conscious - that comes with the territory, but in this post GFC world it is not an unusual ‘corporate’ frame of mind in any respect

Having said that, ‘penny wise’ can be ‘pound foolish’ in some circumstances.

When considering a major project some key considerations need to be taken into account:-

  • Spending and contingencies – what is needed and where it’s funded from;
  • The project team and who will do what;
  • The involvement of the resident manager and / or the committee in supervision;
  • How long will the project take to complete; and
  • What will it cost?

All of these need to be considered and managed in a strategic way.

We recently successfully worked with a body corporate who gained approval at an AGM to spend $3,620,000 on some major works. Without those works being carried out, body corporate members were faced with potential litigation or worse the building can be condemned for demolition, this has happened in the Surfers Paradise precinct with the Iluka building recently. See the story here:

We think the better approach in matters like this is to meet the challenges head on upfront, and lay out in black and white how & why things can be managed. The alternative is to risk the start of the project being held up while members (who have no expertise) try to save money, thereby placing the entire Body Corporate at risk.

It is dangerous to assume that owners will simply go along for the ride. Individual unit owners can be quite apathetic on matters relating to body corporate, however they will often become engaged when they are asked to put their hand in their pocket for a special levy.

In circumstances where the body corporate is spending a serious sum of money it is worth the investment to source some expert building and funding advice to ensure that the whole process is managed tightly and the body corporate is protected during the construction period.

Body Corporate’s would know, it can be difficult to fund remedial building works from the sinking fund, regular levies, or special levies which may leave the option of borrowing an attractive alternative to fund these high expense items.

Body Corporate’s are now borrowing to fund major expenses, as the N.S.W. & QLD Legislation now allows owners corporations & body corporate to borrow money.

The funding is provided by our preferred lenders, who specialise in this type of funding. The main features and benefits are:

  • The loan is unsecured, i.e. no mortgage, lien, charge or caveat.
  • No personal guarantees from the owners or committee members are required.
  • Terms up to five or even ten years are available in some cases
  • There are no ongoing or lump sum payment fees once established (loan application and brokerage fees apply)
  • Interest can be fixed or variable

There are several advantages in borrowing to fund capital works:

  • High risk building deficiencies can be rectified in one line, which is more cost effective as expensive scaffold, swing stages, hording and OH&S systems are set up and being used, thus reducing the risk of potential litigation.
  • Ultimately the building maintains it’s presentation, structural integrity, rental returns and retains its value.
  • Body Corporate Committees don’t need to keep asking body corporate members for more money, if something else needs to be rectified.
  • No more onerous special levies, sinking funds can be set over a 5 or 10 year period, freeing up cash flow.
  • The building work is warranted over the period of the loan, so there is “peace of mind” that no more money needs to be spent on the external of the building or on other common property covered by the works.
  • Borrowing is fast - funds can be available within a week of a General Meeting and lodgment of loan documents.
  • Owners who do not keep their units for the duration of the loan term do not pay for the full cost of the works, making the system fairer and more user pays.

Should Body Corporate wish to proceed with the funding option, a loan specialist will contact you, and will require some or all of the following to get the process started:

  • Owners Corporation or CTS number
  • Number of lots & property type (residential / commercial / mixed)
  • Approximate value of an average unit (a guess is sufficient)
  • The owners corporation financial statements and an aged debtors list
  • A proposed budget incorporating the loan repayments
  • A copy of the owner’s corporation minutes passing a General Meeting resolution to borrow the funds and carry out the works. (An indicative loan funding proposal, facility agreement and the necessary meeting resolutions will be provided from the lender for this purpose. It is also recommended you seek legal advice if required.)
  • When your general meeting has made its decision, the funder will contact the strata manager or secretary and obtain any further information required to approve loan and prepare loan documents to be signed by members of the executive committee.
  • A copy of the registered strata plan & strata roll
  • The loan is then ready to be drawn down to pay contractors as the works are completed.

The specialist broker will explain the funding, loan offer documentation, how it works, and provide a choice of loan terms and repayment levels, keeping you informed at each stage of the process.

The finance solution makes sense for Body Corporate to fund major works quickly, retains property values, rental yields, and reduces the potential for any litigation.

Our specialist building team can also consult with private owners about private internal refurbishments whilst on site, which may reduce the cost for any of these additional private unit holder works.

To give you an idea of what it may cost to service the loan here is a link to the ASIC Moneysmart loan repayment calculator:

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