Understanding the body corporate budget process

Understanding the Body Corporate Budget Process

By Bennie van Dyk – Senior Operations Manager: Community Schemes Management

When living in a sectional title scheme, the monthly contributions to funding the scheme’s operations, are one of the first things prospect buyers look at.  Your monthly levies play a big part in the decision to determine affordability on the part of the buyer but more so on the part of the financial institutions granting the loans for such transactions.  Let’s look at the process of budgeting required for a sectional title scheme.

The trustees, or scheme executives as they are called lately, must determine the estimated income and expenditure of the scheme each year.  They are allowed to implement a total contribution (levy) increase of up to 10% at the beginning of each financial year which will then be confirmed later by the members of the body corporate at the Annual General Meeting of the scheme. It is recommended that this process happens each year a month before the financial year-end of the scheme so that the new levies can be implemented on the first day of the new financial year for the full 12 months.

The budget consists of two parts.  The first part is referred to as the operational budget or administrative budget.  This budget will cater for the following, to name a few:

  • Municipal expenses
  • Monthly contracts
  • Salaries and wages
  • Daily ad hoc maintenance expenses
  • Administrative expenses – legal fees and stationery
  • Financial expenses – auditors and SARS
  • CSOS levies

These expenses will make up your monthly administrative levy.

The second part of the budget deals with the reserve fund.  The reserve fund is linked to the required 10-Year Maintenance and Repair Plan each body corporate must have since October 2016.  This plan must contain the following information:

  • All items on the common property
  • Lifespan of these items
  • Conditions of these items
  • Value of these items

Once your plan complies with the requirements; it would be easy to determine what projects need to be done in which year.  This will address the expense part of your reserve budget.  However, the important part of this budget is the income side.  You need to consider your reserve fund balance and budget for an income stream in such a way that your monthly levies would not fluctuate too much year on year.  In other words, budget some years for more income than what is required to build up a kitty that could be used to fund expensive projects in years to come, such as painting of the scheme.  The STSMA also prescribes that the reserve fund level should never dip below 25% compared to your total operational budget for the year.  If that happens, you are required to increase your reserve fund contribution automatically by 15% excluding any reserve fund expenses planned for that year.

If the reserve fund levels are between 25% and 100% of the operational budget, the STSMA provides that you only need to top up the reserves with the amount required for maintenance during that year.  This keeping the reserves at the same level.

If your scheme is in the fortunate position of having reserves that are more than 100% of the operational budget, there is no requirement to budget for an income.  However, as previously mentioned, you need to build reserves for those years with the expensive projects to avoid raising special levies during those periods.

The monthly levies raised in terms of the reserve fund budget will reflect as your reserve fund levies on your monthly statements.

Both your administrative and reserve fund levies are calculated according to the participation quota associated with your specific unit.  It is your portion that you contribute to the maintenance of the common property and the administration of the scheme.

Therefore, it is important for owners of units in a sectional title scheme to be actively involved in your scheme.  Report maintenance issues timeously to either the trustees or the managing agent so that these issues can immediately be attended to.  Attend general meetings of the scheme and actively participate in the decision-making process and ensure that people are elected as trustees that would actively maintain and protect your investment.

For more information about your scheme’s budget and financial matters, do not hesitate to contact your designated portfolio manager at MidCity Property Services (Pty) Ltd.

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