As per each State and Territory’s specific regulations, a Sinking (or Reserve Fund, Maintenance Fund, 10 Year Plan etc.) Fund budget must be prepared by an appropriately qualified professional like us at Gleeson Quantity Surveyors.

Do you understand the mechanics of your sinking fund? Many of us contribute hundreds, or thousands of dollars towards the sinking fund within our body corporate fees each year. But why, what is this for? How do we know it is being appropriate managed and doing what it is supposed to? How does it protect the value of our investment? How do we accurately forecast for future works?

Firstly, what is a Sinking Fund? Nearly all bodies corporate require a formal sinking fund to be set up (except for specified two-lot schemes). A sinking fund must allow for raising a reasonable capital amount from Owner’s contributions, to provide for necessary and reasonable spending relating to replacement, repair and/or maintenance of the property’s capital items. The law requires a sinking fund budget to consider the current financial year, and also the reservation of an amount to meet likely spending for at least the next 9 years. For example, these funds could be used towards, re-painting, repair/replace roofs, gutters, and downpipes, repairing or replacing components of the lift, replacing fencing etc. Appropriate budgeting and planning reduce the likelihood of special levies which typically become a serious burden on lot owners. It also ensures the body corporate has sufficient funds to maintain the level of amenity and quality of the property, which without can seriously affect re-sale when potential purchasers search body corporate records. If a Purchaser identifies that the property is in dire need of a re-paint, but the body corporate records show the sinking fund has a low balance, or shows a substantial future increase in levies, will they likely proceed with the sale at the desired price?

To ensure the Sinking Fund is being appropriately managed and doing what is intended, a professional Quantity Surveyor (QS) is engaged to complete a Sinking Fund Forecast. As the law calls for the budgeting of future works, it ensures bodies corporate are always looking ahead regarding future capital works. This is so that the sinking fund budget can accrue and have sufficient funds leading up to the required work. Unfortunately, 10 years (current and next 9 years) is not looking far enough into the future, many major works items worth considering may have a useful life greater than 10 years. It has become industry standard that your sinking fund forecast will include a 15-year forecast period so that the body corporate gets a 5-year shelf life out of the professionally prepared report, whilst still complying with the legislative requirement of budgeting for the current year and 9 years into the future. It is however still prudent for your QS to consider works required outside of the 10 or 15-year forecast period to ensure the body corporate funds are not left short in the future.

The preparation of a sinking fund forecast is recommended to be prepared by a suitably qualified and experienced QS. Why a QS? QS’ are experts in historical, current, and future construction related expenses. Preparing sinking fund forecasts, however, is a niche offering in the QS field and experience in preparing these reports is crucial. With experience comes a large array of critical data. Analysing similar properties, of a similar and greater age, size, construction type, style and location can greatly assist in forming up an accurate future cashflow. Future capital works are estimated by measuring and costing the work as at the date the report is prepared and utilising an escalation factor to estimate a future value of the work. As we have seen in recent years, volatility in the construction and export/import markets can have a dramatic effect on the health of the sinking fund and previously estimated future value of the work. We strongly recommend if the closing balance of your sinking fund is out by 10% or more, when compared to the forecast, then it should be reviewed. Your levies could be too high, or too low.

The sinking fund forecast exercise is also heavily reliant on the information and input by the body corporate / strata manager, on-site management and/or relevant committee members. To enable an accurate forecast, we as QS’ require access to financial records, details on recently completed works, current quotes to hand, future planned works (potentially already discussed at a recent AGM), plans of the property and the committee’s view or vision on works that require more immediate attention than others. At the end of the day the body corporate will vote on whether works proceed or not, so it is important the committee be consulted prior to forecasting works. An inspection is also a crucial piece of the puzzle. An inspection ensures all related works are captured and budgeted for, it is often where the committee / on-site management has the opportunity to raise any sinking fund related issues and also, crucially, share the history of the property that may affect the accurate forecast of future expenses. Importantly, a sinking fund forecast is a budgeting exercise and a QS is not a qualified building inspector. It is however recommended that a building inspector (like our in-house qualified building inspectors) be engaged prior to the preparation of the sinking fund to ensure any defective or deteriorating works are considered within the forecast.