Creating a financial roadmap for your sectional title scheme starts with understanding how your levy is calculated and what it includes. To that end, we will focus on the three parts that make up the community scheme levy in this article, namely the contributions required for the reserve fund, the contributions to the admin fund and the CSOS fee.
Reserve fund levy
The reserve fund (RF) is used to fund expenditure relating to the maintenance, repair and replacement of capital assets, such as roofing, exterior walling, roads, driveways and other common property structures. Also known as planned maintenance or preventative maintenance, the goal is to prevent deterioration and extend the useful life of capital assets as it tends to be more cost-effective than emergency repairs and full replacement.
In theory, the RF levy amount is determined by the following calculation:
Cost of planned maintenance activities – (reserve fund opening balance + interest earned on reserve fund account)
It is best practice to perform this calculation not only for the year ahead but against the backdrop of the 10-year maintenance, repair and replacement plan (MRRP).
For that reason, one needs to find the perfect balance between an amount that is–
a) sustainable in the long-term when escalated annually by the average inflation rate and
b) adequate for funding the required maintenance expenditure, while
c) avoiding the need for special levies and
d) ensuring that the annual RF contribution does not fall short of the minimum amount prescribed by STSM Regulation #2.
This long-term approach is best achieved by creating a 10-year reserve fund cashflow forecast that is based directly on the 10-year MRRP. It will tell you exactly how much money is available at the end of each financial year based on the opening balance, interest earned, levy contributions and maintenance expenditure.
Where a body corporate has a history of poor financial management, it may have to resort to a special levy or a bridging loan before getting back on track to financial prosperity. With a regularly updated cashflow forecast in hand, the trustees possess the perfect tool to lessen the dependency on such radical measures.
Administrative fund levy
The administrative fund (AF) pays for operational expenses such as management fees, insurance premiums, salaries and routine maintenance activities that keep assets in good working order.
Routine maintenance includes activities such as replacing light bulbs, fixing leaking taps, repairing a faulty gate motor, cleaning the pool, garden services, elevator maintenance and other related tasks performed on a frequent or ongoing basis. Other admin fund expenses typically include water and sanitation, electricity, refuse removal, bank fees, accounting, the insurance valuation, the 10-year maintenance plan, CSOS levies, etc.
Budgeting for the admin fund is an essential step towards gaining control of your body corporate's expenses. This can be improved by taking the same long-term approach as described for the reserve fund – by projecting the admin fund cashflow over 10 years.
Combining the 10-year RF and AF cashflow forecasts will give you decisive control of your body corporate's finances. Given the proper tools, such as Mirfin’s online template, it can be really simple.
Community Schemes Ombud Service Levy
Section 11 of the CSOS Regulations of 2016 stipulates that a levy is payable by every community scheme on a quarterly basis. The CSOS levy to be collected from the unit owners is calculated as “the lesser of R 40.00 or 2% of the amount by which the monthly levy charged by the Scheme exceeds R 500.00”.
(A practice directive published by CSOS has clarified that the 2% is based on the administrative levy only and excludes the reserve fund portion.)
Calculating your total monthly levy
To calculate the total monthly levy for your unit, simply apply the formula for each part as shown below and add them together:
Contact us at email@example.com for assistance with getting your scheme’s finances back on track.