In a previous article, we explained how a Strata Plan is funded. All owners in a building are required to pay Strata Levies.
In this article we will provide some more details around strata levies, also known as strata fees, and strata management fees.
Strata Levies are typically raised quarterly and collected on behalf of the Owners’ Corporation. The exact amount is usually agreed once a year during the Annual General Meeting. Previously, we covered that these levies normally consists of two components, the Administration and Sinking Fund.
The funds raised are used for the day-to-day management and operation of the building. Typically, money is also put aside for ongoing maintenance & repairs of the building. It is in the interest of all owners to keep the building well kept and well maintained.
Each owner is required to pay their fees. Any unpaid levies typically attract 10% interest, if not paid within 1 month of its due date. Did you know that any outstanding levies will be deducted of the final settlement amount, in case an owner decides to sell out of a building?
Strata Management Fees
If a building has engaged the services of a professional Strata Management Company, the Owners Corporation will be required to pay the agreed monthly management fees. This will cover the services of the appointed strata manager and cover their costs, such as salaries, telephone, printing, postage and archiving. These expenses are commonly known as disbursements. Many Strata Management agencies charge a management fee, and then a separate charge for these disbursements. This makes a clear and upfront understanding of their fees often very difficult. At Premium Strata, we believe in full transparency and as such all regular disbursements are covered in our fees. This avoids nasty surprises. When comparing potential strata managing agents, it is very important to have a detailed understanding of what is included, and what is charged separately in the contract.
Before we move on, on the topic of Archiving fees. Did you know that most records of a Strata Plan must be kept by the Owner’s Corporation for a minimum of five years? Details on which records must be kept can be found here.
Are lower levies always a good thing?
When it comes to strata levies, are lower levies always a good things? At first glance, you might think it is. It may mean lower monthly expenses for you, but there are a number of potential issues you should look out for?
The amount you pay in strata levies is typically a result of the following factors:
- The location of your building: a building in Sydney CBD is typically more expensive to keep than a building in Townsville. This is related to the higher cost of living in Sydney.
- The quality of the building: a solid, well-built building using durable materials might cost more when acquiring but typically costs less over the life-time of a building.
- The facilities offered in the building: a gym, extensive gardens, 24 hour concierge, electronic garage doors are all features which can drive up the levies significantly. You pay for the convenience and added security.
There are a number of ways in which a building can be ‘creative’ in reducing the levies it needs to raise:
This could be an attractive option for smaller buildings, as the cost for a strata managing agent makes up a proportionally large share of their total levies. However, whether this is a sensible option depends on the quality of the Executive Committee. In most cases owners either do not have the required expertise, time or will to take on this responsibility. In this case they would hire the services of an experienced, licensed strata manager.
Quality of Strata Management Agency
Like in any industry, there are varying levels of quality and service when it comes to strata managers. Which strata management company is right for your building depends on the level of expertise and quality of service you expect from your strata manager. Larger buildings are often more complicated to manage, and if you have building defects you would want an experienced manager who can offer you solid and reliable advice.
Sinking Fund Short Changing
By not raising any or insufficient sinking fund levies you are not reserving funds for maintenance work which all buildings require at some stage. When considering acquiring a new unit, it pays to investigate the amount of money in the sinking fund of a building. A low or non-existing sinking fund may indicate Special Levies may need to be raised in the future.
Not maintaining the building
You would want to safeguard the investment you made in your building. By not maintaining it properly you devalue your investment and will almost certainly increase the maintenance costs over the long-term. Every building needs regular maintenance.
Developer Funded Levies
In the case of new developments, it is not uncommon for the developer to hold a majority of the units. They may choose to do a lot of the maintenance work themselves, helping to keep levies lower than would normally be the case. This saves them money in reduced levies and will also help attract potential buyers. There is nothing wrong with this. Just be mindful that eventually your levies are likely to have to increase.
By not adjusting the levies for CPI (Consumer Price Index) changes each year, the revenues of a strata scheme will increasingly not match the expenses. The building will eventually be in deficit. Loans can cover this debt, but interest is due and eventually this loan will need to be repaid.
All of the above, highlights the need to do your homework before buying into a Strata building. A Strata Search by a trained professional is highly recommended, as it will help avoid unpleasant surprises at a later stage.
Remember, low strata levies are good only if it genuinely covers the costs of running and maintaining a building. Ultimately, you always get what you pay for!
We hope you found this little guide useful. Please keep your eyes open for future posts, as we will continue to work towards making the somewhat complex world of strata management just that little bit easier to understand.