Calculating Body Corporate Levies: A Comprehensive Guide
In the previous post, we addressed the most frequently asked questions regarding sectional title levies (read it here). In this post, we’ll explain how bodies corporate calculate these levies.
Setting levies without bias
When calculating sectional title levies, it is crucial to make impartial decisions. The process of determining body corporate levies should be transparent and systematic.
Many bodies corporate use inadequate three-column budgets, comparing the previous year’s budget with actual spending and the current year’s budget. Trustees may be biased when proposing levies, driven by personal reasons like financial difficulties or a desire to sell their unit. Typically, the managing agent suggests a levy based on the updated budget, approved by trustees before the AGM. Setting a too-low levy can deplete building reserves, necessitating a substantial increase at the next AGM, causing discontent and friction. Levies should consider previous year costs, current savings, expected service increases, contractual increases, and routine maintenance costs.
The unexpected effect of an insurance valuation
During the triennial valuation, a body corporate may experience a significant adjustment in its sum insured and the corresponding insurance premium, depending on the adjustments made over the previous three years. If the sum insured increased by the standard rate or remained unchanged, a downward correction may be needed, causing concerns among members about potential under-insurance. However, this correction is a natural step after inflated increases, resulting in a proportional decrease in the insurance premium. On the other hand, if insurance escalation has been minimal, the adjustment to the actual replacement value can lead to dissatisfaction among members, emphasising the importance of selecting a reputable valuer offering free annual updates between mandatory cycles.
Maintenance of capital assets
Through careful examination of past maintenance activities and vigilant monitoring of the building’s condition, trustees can reasonably predict future maintenance requirements, aiding in the establishment of a pragmatic and viable levy. Mirfin provides a user-friendly online dashboard for trustees to easily modify the 10-year maintenance plan as required.
How does the participation quota (PQ) factor into the calculation of a scheme's levies?
The participation quota (PQ) of each unit in a sectional title scheme is based on the floor area of the section as specified on the sectional plan. The PQ determines the proportionate share of ownership interest that each unit has in the common property of the scheme.
The role of the PQ is to determine the proportion of the total expenditure that each owner has to contribute towards. When calculating levies or expenses, the PQ is used as a basis for allocating costs among the unit owners. Owners with larger units (higher PQs) are responsible for a larger portion of the expenses, reflecting their greater share in the common property.
For example, if the total expenditure for a specific period is determined to be R100,000 and an owner’s unit has a PQ of 20 out of a total PQs of 100, that owner would be responsible for paying 20% of the total expenses, which amounts to R20,000.
By utilizing the PQ as a proportionate measure, the scheme ensures a fair distribution of costs and expenses among the unit owners based on their respective ownership interests. It reflects the principle of proportional sharing, where owners with larger units contribute more towards the maintenance and management of the common property.
What role does the 10-year maintenance plan serve in projecting costs for capital improvements of the common property?
The 10-year maintenance plan is a crucial tool for all sectional title schemes. This plan is typically prepared by the trustees of the scheme and is updated on an annual basis.
The primary role of the MRR plan is to provide a long-term roadmap for the maintenance, repair, and replacement needs of the common property over a 10-year period. It identifies the anticipated major work and capital improvements that will be required, such as painting, roof repairs, elevator maintenance, landscaping, and other essential projects. By projecting these future costs, the plan allows the body corporate to allocate funds and plan their finances accordingly.
The 10-year plan also helps in avoiding sudden financial burdens or special levies by spreading the anticipated costs over a longer timeframe. It enables the body corporate to budget for these expenses and establish a sinking fund or reserve fund to accumulate funds gradually over time. This proactive approach ensures that there are sufficient funds available to cover the anticipated costs when they arise, reducing the need for sudden financial contributions from owners.
How are a body corporate's admin fund levies calculated?
Here are the steps/formula on how to calculate the administrative fund levy for each unit in a sectional title scheme:
- Determine the PQ (Participation Quota) of the specific unit for which you want to calculate the administrative fund levy. The PQ is usually specified in the sectional plan and represents the unit’s share of the total floor area in the scheme.
- Obtain the total administrative fund budget. This refers to the overall budget allocated for the administrative expenses of the sectional title scheme, such as insurance, management fees, utilities, and general maintenance.
- Calculate the sum of the PQs for all units in the scheme, known as the total PQs of all units. This value represents the cumulative PQs of all individual units in the sectional title scheme.
- Apply the formula: Divide the PQ of the specific unit by the total PQs of all units, then multiply the result by the total administrative fund budget. This calculation will give you the administrative fund levy for that particular unit.
Here’s the formula in action:
Administrative fund levy = (PQ of unit × Total administrative fund budget) / Total PQs of all units
How are a body corporate's reserve fund levies calculated?
Here are the steps/formula on how to calculate the reserve fund levy for each unit in a sectional title scheme:
- Determine the PQ (Participation Quota) of the specific unit for which you want to calculate the reserve fund levy. The PQ represents the unit’s share of the total floor area in the scheme and is typically specified in the sectional plan.
- Obtain the total reserve fund budget. This refers to the overall budget allocated for the reserve fund, which is intended to cover major repairs, replacements, and future capital expenses related to the common property.
- Calculate the sum of the PQs for all units in the scheme, known as the total PQs of all units. This value represents the cumulative PQs of all individual units in the sectional title scheme.
- Apply the formula: Divide the PQ of the specific unit by the total PQs of all units, then multiply the result by the total reserve fund budget. This calculation will yield the reserve fund levy for that particular unit.
Here’s the formula in action:
Reserve fund levy = (PQ of unit × Total reserve fund budget) / Total PQs of all units
What is the method for calculating the total levy contribution per unit in a sectional title scheme?
You can calculate the total levy for each unit in a sectional title scheme by adding up the administrative fund levy and the reserve fund levy:
- Calculate the administrative fund levy for the specific unit using the formula:
Administrative fund levy = (PQ of unit × Total administrative fund budget) / Total PQs of all units - Calculate the reserve fund levy for the specific unit using the formula:
Reserve fund levy = (PQ of unit × Total reserve fund budget) / Total PQs of all units - Add the Community Schemes Ombud Service CSOS Levy = [(Administrative Fund Levy + Reserve Fund Levy) * CSOS Levy Rate]. CSOS Levy Rate is the percentage rate set by the CSOS, expressed as a decimal, which determines the proportion of the total levies payable that constitutes the CSOS levy.
Body corporate levies calculation example
Let’s consider a numerical example with realistic values for PQs and budgets to illustrate the calculation of levies, including the CSOS fee.
Assume we have a sectional title scheme with four units (Unit A, Unit B, Unit C, and Unit D) and the following information:
- PQ of Unit A: 15
- PQ of Unit B: 25
- PQ of Unit C: 40
- PQ of Unit D: 20
- Total administrative fund budget: R200,000
- Total reserve fund budget: R150,000
- Total PQs of all units: 100 (15 + 25 + 40 + 20)
- CSOS levy rate: 0.2 (20% expressed as a decimal)
Now, let’s calculate the levies, including the CSOS fee, for each unit:
- Administrative fund levy calculation:
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- Administrative fund levy for Unit A = (15 * 200,000) / 100 = R30,000
- Administrative fund levy for Unit B = (25 * 200,000) / 100 = R50,000
- Administrative fund levy for Unit C = (40 * 200,000) / 100 = R80,000
- Administrative fund levy for Unit D = (20 * 200,000) / 100 = R40,000
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- Reserve fund levy calculation:
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- Reserve fund levy for Unit A = (15 * 150,000) / 100 = R22,500
- Reserve fund levy for Unit B = (25 * 150,000) / 100 = R37,500
- Reserve fund levy for Unit C = (40 * 150,000) / 100 = R60,000
- Reserve fund levy for Unit D = (20 * 150,000) / 100 = R30,000
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- CSOS levy calculation:
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- CSOS levy for Unit A = (Administrative fund levy for Unit A + Reserve fund levy for Unit A) * CSOS levy rate
- CSOS levy for Unit B = (Administrative fund levy for Unit B + Reserve fund levy for Unit B) * CSOS levy rate
- CSOS levy for Unit C = (Administrative fund levy for Unit C + Reserve fund levy for Unit C) * CSOS levy rate
- CSOS levy for Unit D = (Administrative fund levy for Unit D + Reserve fund levy for Unit D) * CSOS levy rate
Finally, let’s calculate the total levy contribution per unit by adding up the administrative fund levy, reserve fund levy, and CSOS levy:
- Total levy for Unit A = Administrative fund levy for Unit A + Reserve fund levy for Unit A + CSOS levy for Unit A
- Total levy for Unit B = Administrative fund levy for Unit B + Reserve fund levy for Unit B + CSOS levy for Unit B
- Total levy for Unit C = Administrative fund levy for Unit C + Reserve fund levy for Unit C + CSOS levy for Unit C
- Total levy for Unit D = Administrative fund levy for Unit D + Reserve fund levy for Unit D + CSOS levy for Unit D
Which best practices and tools should a body corporate use when calculating levies?
Trustees and managing agents can employ several best practices and tools to calculate levies accurately and fairly in a sectional title scheme:
- Regular review and updates of PQs and budgets: Trustees should review and update the Participation Quotas (PQs) and budgets regularly to ensure they reflect any changes in the scheme, such as alterations or additions to units.
- Conducting valuations and inspections: Regular valuations of the property and inspections of the common areas help trustees assess the condition and value of the assets. This information is crucial for determining the appropriate reserve fund budget and identifying potential maintenance or repair needs, ensuring accurate levy calculations.
- Consulting with owners and service providers: Trustees should engage in open communication with owners and seek input regarding budgetary needs and expectations. Consulting with professionals like accountants, surveyors, or managing agents can provide valuable insights to ensure accurate and well-informed levy calculations.
- Utilizing online platforms or software: Online platforms or software like the Mirfin Dashboard designed for sectional title scheme management can automate levy calculations, generate reports, and streamline the administrative processes. These tools reduce the chances of human error and save time, enabling accurate and efficient levy management.
Learn how to create a 10-year maintenance plan
The reserve fund, admin fund and levies all play an important role in creating a successful and sustainable 10-year maintenance, repair and replacement plan for bodies corporate and homeowners’ associations. The admin fund is used for day-to-day expenses such as repairs and maintenance, while the reserve fund is set aside for major expenses that are expected to occur in the future, such as roof replacements or paving projects. The levies are fees charged to each owner in order to fund these two accounts.
Manage your 10-year plan on the Mirfin Dashboard
The objective is not to achieve an accurate 10-year plan from the onset, but to have a reasonable estimate of the reserves required for the preservation of the combined capital assets. Accuracy can only be gained over time through ongoing adjustments in accordance with actual expenditure and contributions. The 10-year maintenance plan is, therefore, a “living” document that should continuously adapt to the scheme’s specific needs.
