This guide is to help strata owners and managers deal with the important cash flow decisions that will arise during the Coronavirus pandemic and its aftermath.
We cover what to do about the payments that the corporation needs to make and the various ways of funding those payments.
Payments by the Strata Corporation
There are three simple options available:
1. Don’t pay anyone.
2. Work out a metric for paying some people.
3. Or pay everyone.
We strongly believe that all corporations should make all payments to all creditors during this time.
If payments are not made, people suffer, and if we as a community don’t keep making payments to our creditors, we’ll just be adding to the economic distress. As the government says, “We’re all in this together.”
The vast majority of payments that a strata corporation makes are to small businesses—the cleaner, the gardener, the guy who fixes the lights, etc. Even apparently large contractors engaged in large capital works on buildings pay a multitude of subcontractors, all of them individuals with families who rely on being paid.
Strata Management – Levies
Normally, people look to legislation for guidance on how to structure levies. All states have legislation that requires corporations to raise levies to meet their outgoings.
But this is a time for common sense and practicality mixed with empathy and compassion.
It’s also a time to recognise the obvious: All corporations are different. They are composed of different people with differing financial situations and views, so there can never be a “one size fits all” approach.
Interest in Levies in Arrears
Each state has a method of setting the interest rate that the corporation can charge owners with levies in arrears.
We would like people to think carefully when considering applying this charge.
There is a very good financial principle that people who can’t pay on time should be charged interest. But in these circumstances, each corporation should consider the extent to which, in their particular and specific situation, charging interest is appropriate or just has the effect of transferring additional costs from the haves to the have-nots. The haves will pay their levies on time. The have-nots can’t. What is the right thing to do in your particular community?
Alternatives
One option is to carry on as normal and assume that levies will continue to arrive in the corporation’s bank account. However, this is not normal, so that doesn’t make sense.
Another is to review the likely default rate in paying levies and set the levies higher so that sufficient funds are raised after accounting for the non-payers. If you think that half the people in your community won’t be able to pay, then you could set the levies at double the amount.
In theory, this would work, but it has many problems. People who cannot afford the increased levies would be deemed unfinancial and lose their voting rights, which is unfair in this situation. It also creates a problem down the road—some people will have paid more than the “usual” amount and will want reimbursement, while others will be way behind. Eventually, this will need to be balanced out.
Another levy option is to reduce or defer levies and fund the corporation by the other means outlined below.
If not from levies, where can the money come from?
Special Levies – Strata Management
Special levies are out for the duration. Except for a small number of very unique situations, take them off the agenda. If people can’t afford normal levies, a special levy just asks for your arrears to increase.
Sinking Fund / Maintenance Fund / Capital Works Fund
If you have it, use it.
Each state has different rules about how, when, and what amounts in a sinking fund can be transferred for general use, so you will need to discuss this with your strata manager and perhaps your strata lawyer.
However, regardless of the state rules, we think everyone should be pragmatic and use whatever funds are available.
Whilst state strata legislation may throw up a few impediments, there are good economic reasons to use your sinking fund.
First, it does not require a current cash contribution from owners. Later, you’ll need to reconsider the appropriate balance, but at this crisis time, use the cash that’s already available.
For most corporations and most owners, a sinking fund is the most expensive money they have. Considering opportunity cost and tax, a sinking fund is not an efficient means to fund your future capital works. Using the money that costs you the most makes sense before working your way through to the less expensive forms of funding.
Borrowing
As a lender, Lannock is very attuned to the benefits of borrowing.
Cash is available when you need it. All creditors can be paid, which means that those people can, in turn, meet their obligations, and so on. Levies can be structured so that no one is unfinancial and loses the ability to vote in a general meeting.
Refer to Levy Assist for more information on how Lannock can provide your strata corporation’s working capital over the virus’s term. We have waived all fees on our working capital lending, so you will only pay for what you use when you use it. This also means that you won’t pay a cent if you set the facility up as a financial safety net and never use it.
Corporate Governance
The strata manager can make some of the decisions that flow from this, and the treasurer or strata committee can make others.
However, as a principle of good governance, financial decisions should generally be made or ratified in a general meeting.
It’s not just a matter of good governance; it is to be preferred so that all community members are aware of the issues and can participate in decision-making.
We recommend you start working on these issues now and hold a general meeting in the next month or so.
Strata Summary
1. Pay your bills – team Australia needs it
2. Forget about special levies for the present time
3. Think carefully about whether, how and why you apply the interest rate on levies in arrears
4. Use your sinking fund
5. If you need the funds or want a back-up just in case, set up a working capital borrowing facility such as Levy Assist
If you would like further advice on body corporate management matters, Phil can be contacted by email at philip@lannock.com.au or by telephone +612 9357 5371 Lannock Finance https://lannock.com.au/
