PROPERTY MANAGEMENT
Understanding Your Financial Management Obligations as a Trustee
BY LOUW LIEBENBERG
Much has been said and written about the recently updated Sectional Titles Schemes Management Act . With all the complexities involved in the day-to-day management of a sectional title scheme , it is not surprising to find yourself slightly confused . One can spend days on understanding scheme rules , insurance , common use areas , fines and all the rest of a very long list of issues that come into play when people share a space .
In the process of figuring out what is mine , yours , ours and who broke what , it is easy to lose focus on perhaps the most important aspect of managing a sectional title – its finances . Very often , trustees appointed by a scheme are not finance professionals ; they rely on reports and advice from managing agents appointed to manage the scheme on behalf of the body corporate .
So as a trustee , how do you know if you ’ re always doing the right thing , if funds are managed properly , or if you ’ re acting within the law ? Here are five quick tips :
1 Is there a budget ?
It sounds obvious , but many schemes get tripped up on this one . Every sectional title scheme must have a budget that is approved at an annual general meeting ( AGM ). If there isn ’ t one , or you have not seen one , make sure you get one as soon as possible . The budget is essentially a projection of the expenses needed to run and maintain the operation of the scheme , and must include plans to pay for the replacement of assets .
2
Is the budget being monitored ? A budget on its own does nothing but express , in financial terms , the intent with managing the body corporate . What really counts is compliance with it . One of the best ways to determine this is to see if actual expenditure matches what was planned . In this regard , it ’ s important to be wary of both positive ( underspend ) and negative ( overspend ) variances . Underspending might feel good because it feels like you ’ re saving money – but it also means there are parts of the plan that are not being executed as planned .
3 Permissions
Each scheme has its own rules governing who may approve what . In some instances , managing agents are given authority to spend funds on behalf of the body corporate , and in others , the trustees insist on co-approval of expenses . Make sure you understand who is authorised to approve what , and ensure that all decisions are made in accordance with the approval framework . Rules are meaningless if they are not being enforced !
4Show me the reserve ! Every sectional title scheme is obligated by law to establish and maintain a reserve – defined as a pool of funds that are invested separately and are not required for immediate use . The purpose of the reserve is to pay for contingencies and long-term maintenance and upgrade projects . A minimum balance equal to 15 % of total levy contributions for the year is required . If your reserve exceeds that , you don ’ t need to budget for more , but must be able to pay for budgeted repairs and maintenance from the levy contributions you will receive for the year . If your reserve is more than 100 % of projected levy collections , you don ’ t need to make provision for any further contributions to the reserve pool .
5Arrears hurt everyone The saying goes that anyone can be a millionaire on a spreadsheet . On paper , a sectional title scheme can be solvent and well maintained , but if the levies are not actually collected , there is no way that it will function properly . It is therefore crucial to understand who owes what , and what is being done to collect what is outstanding .
As noted above , the skill set and effort required to manage the financial and administrative components of a sectional title scheme forces many trustees to appoint a managing agent . However , this does not release them from their duty of care : it ’ s important to know if your managing agent has the correct financial management and reporting tools to give you all the information you need .
RESOURCES
PayProp
26 MARCH 2017 SA Real Estate Investor www . reimag . co . za