Setting levies without bias

January 8, 2021

Setting levies without bias

Sectional title levies can be the source of a great deal of debate and conflict within a body corporate. The process of determining body corporate levies should be transparent, methodical and done without any bias. An independent approach to calculating levies ensures that the body corporate can meet both its day-to-day obligations, as well as the planned projects in their 10-year maintenance plan– whilst remaining reasonable and consistent.

Beware of biased decision-making

Far too many bodies corporate make use of insufficient three-column budgets, comprised of the previous year’s budget vs the actual spend for that year, plus the budget for the current year. Sometimes, trustees may be tempted to act with prejudice when proposing a levy for the upcoming year. They may have a personal reason for wanting to keep the levies low, such as a difficult financial position or the intention to sell their unit.

Ordinarily, the managing agent will propose a levy based on the updated budget. This is first presented to the trustees for their approval before being shared with the rest of the body corporate at the annual general meeting (AGM).

Determining a levy that is too low may cause a steady decline in the building’s reserves over time, which will inevitably require a drastic levy increase at the next AGM in order to recover the reserves. When such an increase in levies from one financial year to another is more than inflation, it will almost certainly lead to discontent amongst the members, as well as create friction at the AGM.

Levies need to be based on actual costs from the previous year, current levels of saving, anticipated annual increases in services from local authorities, annual increases in contractual agreements with service providers and anticipated costs for routine maintenance- as opposed to planned or preventative maintenance which is paid for from the reserve fund.

The unexpected effect of an insurance valuation

If the scheme is due for its triennial valuation, the body corporate may face a significant upward or downward adjustment in its sum insured, along with the associated increase or reduction in insurance premium. This depends on how the sum insured was adjusted during the 3 years since the previous valuation – for example, if it was escalated by the standard rate of 10-15% per annum, or not at all.

In case of the former, the prevailing sum insured will likely require a downward correction, which often shows insecurity amongst the members who might be concerned that a reduction will lead to under-insurance. However, this should not be cause for alarm, as it is a natural correction that needs to happen after a period of inflated increases. The happy consequence will be that the insurance premium will also decrease proportionately, and highlights the importance of using a reputable and independent valuation company with sufficient professional indemnity insurance.

Conversely, where the annual insurance escalation has been minor to non-existent over the years, the body corporate is in for a reality check when the insurance premium gets adjusted to reflect the actual replacement value. Likewise, this will certainly leave many members disgruntled and, once again, highlights the merit of appointing a credible valuer that offers free annual valuation updates between mandatory valuation cycles.

Maintenance of capital assets

By doing a thorough analysis of past maintenance works and keeping a close eye on the condition of the building, trustees will be able to anticipate any upcoming maintenance needs with a reasonable amount of accuracy. This will assist with setting a realistic and sustainable levy.

Mirfin offers a self-managed online dashboard where trustees can make adjustments to the 10-year maintenance plan whenever needed.