Budget time is traditionally a problematic time in the annual calendar of Sectional Title Complexes in South Africa. Traditionally there are a lot of vocal opposition, but very little people who are prepared to put in the effort to get the job done as amicably as possible.
Another pitfall in setting up a budget is the individual owners’ intentions in selling their property. Individuals eager to sell their units are eager to spend every penny they can, while those with a long-term investment outlook tend to work more cautiously with the budget.
The Players in the Sectional Title Annual Budget
Trustees, unit owners, and managing agents, managing a sectional title scheme making this type of crucial decision, requires careful financial planning. Creating an annual budget is much like planning a road trip, all of the stakeholders need to map out all necessary expenses, prepare for the unexpected, and ensure that the unit owners understand their financial responsibilities.
We have outlined key steps in budgeting for a body corporate, from understanding the legal framework and determining each owner’s contribution to the approval of the budget.
Understanding the Legal Framework of the Sectional Title Budget
Budgeting for a body corporate starts with understanding the legal framework. The primary legislation is the Sectional Titles Schemes Management Act (“STSMA”) and the Regulations thereto.
In terms of section 3(1) of the STSMA, your body corporate is required to establish and maintain an administrative fund and a reserve fund.
The Prescribed Management Rules (“PMRs”) of the STSMA Regulationsassist in guiding the preparation and approval of budgets, clarifying certain items, and ensuring they are revised annually.
Think of these as your road map – they ensure you’re on the right path to meeting all legal and financial obligations.
The Administrative Fund
Just as you would plan for fuel, lodging, and meals on a road trip, your body corporate’s budget needs to cover all necessary costs to keep the complex running smoothly. The budget is typically divided into the following components:
- Operating Costs
- Utility Costs
- Maintenance Costs
- Staff Costs
- CSOS Levies
Operating costs
This includes management fees, insurance premiums, bank charges, auditing and accounting fees, security services, other professional services and any other payment amounts to creditors.
There are various different types of insurance that are required under section 3(1) of the STSMA read with PMR 23 so make sure to budget for them all.
The Reserve Fund
The fund’s minimum threshold amount is determined in terms of Regulation 2 of the STSM Regulations.
However, similar to the discipline of setting aside money for a new car if your old one breaks down or for replacing other big-ticket items like tyres or brakes on a long trip, this fund is set aside to cover the costs associated with the 10-year maintenance, repair and replacement plan (“MRRP”) for major capital items that form part of the common property required in terms of PMRs 22 read with 24(2), which must be
- prepared and updated by the body corporate and cover a period of at least 10 years;
- identify major capital items that will require maintenance, repair, or replacement during the period; and
- the estimated costs and expected life span of these items.
A major capital item is defined in PMR 2(i) as “wiring, lighting and electrical systems, plumbing, drainage and storm-water systems, heating and cooling systems, any lifts, any carpeting and furnishings, roofing, interior and exterior painting and waterproofing, communication and service supply systems, parking facilities, roadways and paved areas, security systems and facilities and any other community and recreational facilities”.
These items have a long lifespan but require a substantial amount of funds for maintenance, repair, and replacement.
Special Projects
These are additional expenses for planned improvements or upgrades, such as installing solar panels or upgrading security systems. These are your “extra stops”, the side trips, that make the journey more enjoyable. While not essential, they add value to your complex and should be clearly accounted for in the budget.
Estimating Costs for the Sectional Title Budget
To ensure your scheme has enough funds to make it through the year, it’s essential to accurately estimate the costs for each budget component. You do not want to raise special levies in the middle of the year for unexpected costs.
Non-payment of levies can also have a devastating effect on a body corporate. It is essential that a reasonable buffer is included in the budget to cover these potential shortfalls as well as the legal fees for the recovery of arrear levies.
1) Look at historical data
Review past financial records to identify recurring costs and trends. This helps in predicting future expenses based on what has been spent in previous years.
2) Factor in inflation and price increases
Inflation: the South African Reserve Bank’s inflation target typically ranges between 3% and 6%. Use this as a benchmark when estimating costs.
Service fees: consider any contracts or services that might increase in cost. It’s better to overestimate slightly than to be caught off guard by rising expenses.
3) Bear in mind the Reserve Fund’s “emergency roadside kit” element
In terms of PMR 24(5)(b) the trustees may approve using this fund for urgent unexpected repairs or emergency maintenance which could have been foreseen when the MRRP was prepared.
4) Forecast income
The primary income stream for a body corporate is typically from levies collected from unit owners. However, your scheme may have other income streams such as rentals or benefits from a revenue-sharing model like our STS Outdoor fully funded advertising solution.
PMR 21(3)(d) also requires that a body corporate to invest any moneys in the reserve fund in a secure investment with any financial institution” as defined in section 1 of the Financial Services Board Act, which may result in an additional return.
The Participation Quota
Once the total budget is determined, it must be apportioned among the unit owners based on their participation quotas (“PQ”) unless this has been varied by the developer or the body corporate in accordance with section 11(2) of the STSMA. This process is akin to dividing the road trip costs among passengers based on how much space they occupy in the car. PQs are typically calculated based on the floor area of each unit relative to the total floor area of all units in the scheme. In simple terms, the bigger the unit, the larger the share of the budget that the owner will need to cover.
Exclusive Use Areas
Remember when it comes to exclusive use areas (“EUAs”) section 3(1)(c) of the STSMA requires the body corporate to ensure that unit owners who hold the right to use and enjoy a EUA (whether it is registered or granted by rules) make additional contributions to the funds to cover estimated costs for that EUA, unless the rules provide that the owners concerned are responsible for such costs.
Working towards an amicable Approval of the Sectional Title Budget
Approval of the budget for your sectional title complex for the new year can become a bit of contention. How you approuch the situation takes a lot of skill in human relations and mostly NLP.
1) Preparing the budget
According to PMR 26(1)(e), the body corporate is responsible for preparing budgets for both the administrative and reserve funds. These budgets should include itemised estimates of anticipated income and expenses for the upcoming financial year. It’s worth noting that these budgets may include discounts of up to 10% on annual contributions if members pay their dues on or before the specified due dates.
2) Presenting the budget
Once prepared, these budgets are to be presented at the Annual General Meeting (“AGM”). This is a crucial step in the process, as it allows unit owners to review the financial plans for the coming year. Any discussions, objections, or suggestions should be documented in the minutes of the AGM. This transparency ensures that everyone knows what was agreed upon and why.
Staying on track with your budget
Once the budget is approved, you have the responsibility to stay on track with the expenses. Regular monitoring of your budget helps ensure that your body corporate stays financially healthy.
PMR 21(3)(b) allows for a quick adjustment. The body corporate can increase member contributions by up to 10% at the end of a financial year before the next AGM is held to adopt a new budget. These cover anticipated increased liabilities and remain in effect until members get notice of next year’s contributions.
PMR 25 ensures all passengers are aware of the adjusted contributions by requiring trustees to give notice of the increase to all members.
Managing Bad Debt
On the authority of a written trustee resolution PMR 21(3)(c) allows the body corporate to charge interest on any overdue contributions from members. The interest rate can’t exceed the maximum rate set by the National Credit Act (2005). It’s compounded monthly in arrears, just like how delays can compound travel stress. Currently, the industry norm is 2% per month, compounded monthly.
This ensures all unit owners keep up with contributions, maintaining a smooth journey for everyone. Remember, it’s always best to pay on time to avoid these extra costs!
In Conclusion
By following the steps outlined in this guide, you can create a budget that meets legal and modern requirements and ensures the smooth operation of your complex.
A well-prepared budget is your roadmap to financial stability, helping to build trust among unit owners and ensuring your scheme is well-maintained and financially sound. So, as you set off on this journey, remember careful planning and regular check-ins will keep you on track and heading toward a successful year ahead.
