Differences between an administrative and reserve fund budget
Category Sectional-title Advice
Levies are considered the lifeblood of every sectional-title scheme as these are used to cover all the costs associated with the scheme. Levies are paid by the owners on a monthly basis and cover costs such as maintenance, admin, repairs, limited building insurance, rates and taxes, and other local municipality charges. It is important to note that when levies are collected it is allocated into two separate funds as prescribed by the Sectional Titles Schemes Management Act of 2011 (STSMA).
These funds are:
Administrative Fund: Covers the estimated annual operating costs for repairs, maintenance, and management and administration of common property. This also includes provisions for future costs.
Reserve Fund: This is an additional fund used to cover unforeseen maintenance and repair costs, which have not been budgeted for. Additionally, the Body Corporate is responsible for preparing a 10-year maintenance, repair and replacement plan and pay for its implementation from the reserve fund.
Both the administrative and reserve funds need to be set-up by the Body Corporate within a sectional-title - these are all the owners of specific units. Managing these funds is the task of the trustees (a select group of owners) who are entrusted by the Body Corporate to keep track of a sectional-title's finances in good faith. Furthermore, levies are collected on a monthly basis by either the trustees or a designated managing agent/attorney.
Let's unpack this further
The Administrative Fund
As stated in the STSMA, the administrative fund must be sufficiently used to fund the operating expenses of the Body Corporate for a particular financial year, they may include:
- The repair, maintenance, management and administration of the common property (this includes provision for future maintenance and repairs);
- The payment of rates and taxes and other local municipality charges for the supply of water, electricity, fuel, gas and sanitary or other services to the sectional-title;
- The payment of any insurance premiums relating to the sectional-title; and
- The fulfilment of duties or any other obligation of the Body Corporate.
This fund needs to be sufficient to cover foreseen costs as well as future maintenance and repairs of the common property of which the body corporate is responsible. Money may be paid out of the reserve fund at any time in accordance with trustee resolutions and the approved maintenance, repair and replacement plan.
The reserve fund may be used if trustees deem the maintenance, repair or replacement as urgent.
The following situations are considered legitimate reasons to tap into the reserve fund:
- There are reasonable grounds to believe that an immediate expenditure is necessary to ensure safety or prevent significant loss or damage to individuals on the property or the property itself;
- The need for the repairs could not have been reasonably foreseen in preparing the maintenance, repair and replacement plan; and
- To enable the Body Corporate to obtain adequate and required insurance.
Once the money from the reserve fund is used, trustees must report this to the owners, bearing in mind that only the restricted amount is used.
Tip: Levies (made up of the administrative and reserve fund) are vital contributions for a well-managed sectional-title. This cost can vary dependent on the sectional-title and the amenities it offers. For example; if you're considering buying in a property with a swimming pool, clubhouse and entertainment area etc. - you can expect to pay a higher levy rate. With this mind, before buying a home in a sectional-title, ensure that you understand exactly what you're paying and how the funds will be used so you can budget correctly and understand how your contributions will be managed.
To find out more about sectional-titles and the related levy costs, speak to De Lucia Group today.
Author: De Lucia Group