The OC budget is an integral component of establishing an Owners Corporation. It determines the levies which purchasers can expect to pay and can be a deciding factor for those looking to buy a new strata-titled property.
It may seem tempting to keep OC budgets as low as possible, to create an attractive price for potential buyers. But Developers should be wary of this false economy.
We’ve outlined our key advice for Developers when reviewing Owners Corporation budgets.
Is it a ‘Year 1’ or ‘Year 2’ budget?
In an Owners Corporation’s first year of operation, typically some of the builder’s sub-contractors are required to undertake ongoing maintenance for a period after settlement (usually no more than 12 months) at no additional cost (i.e. lift maintenance, landscape maintenance).
A ‘Year 1’ budget will factor in these services being carried out at no cost. A ‘Year 2’ budget covers all the Owners Corporation’s outgoings for its second year of operation.
We recommend implementing a ‘Year 2’ OC budget from the outset to ensure that the increase to Owners Corporation fees after the first year is minimal. This reflects favourably on the Developer, as the shock increase can lead purchasers to feel misled during the sales process.
Comparing OC budgets.
If comparing Owners Corporation budgets, please be aware of the unscrupulous practice in the industry where some management companies will prepare very low, unrealistic budgets to make it more appealing for Developers to appoint them (for the reasons outlined above)
Implementing such a budget can result in additional fees having to be levied from Lot owners in the first year of operation to meet the cost of Owners Corporation outgoings.
There have been instances where Lot owners have sought recourse from Developers for making misleading claims in relation to Owners Corporation fees. The Knight’s aim is to protect our clients from such occurrences and ensure a Developer’s reputation is upheld.
Owners Corporation insurance premium.
It’s crucial that you confirm with the person who has prepared the OC budget that the Owners Corporation’s insurance premium amount is based upon the building’s replacement value rather than the building’s construction value.
It’s a requirement of the Owners Corporations Act 2006 that insurance covers the full cost of replacing the building. If any combustible materials are used, the budget should be increased.
If you would like to understand how the replacement value is calculated from the construction value, get in touch!
Owners Corporation management fees & charges.
Owners Corporation management companies tend to structure their fees & charges very differently.
There are some companies that will offer a low management fee and then charge for additional services an Owners Corporation will require. This charging structure creates an attractive price up front, but can result in unexpected charges which will quickly leave purchasers feeling disappointed and frustrated.
We suggest that you properly understand the full range of an Owners Corporation Manager’s fees & charges including whether they will receive commission from the insurance premium.
Long term maintenance expenses.
Traditionally, the initial budget prepared for a new Owners Corporation would not typically take into consideration the cost of major refurbishment and/or replacement of common property assets.
However, new amendments to the Owners Corporations Act, coming into effect from 1 December 2021, stipulate that Tier 1 and Tier 2 Owners Corporations (that is, OCs with greater than 51 occupiable lots) must prepare a maintenance plan.
For new projects which will result in the creation of Tier 1 or Tier 2 Owners Corporation, Developers will be required to prepare and present the maintenance plan at the Inaugural Annual General Meeting.
This means, for Tier 1 and Tier 2 Owners Corporations, a budget will be incomplete without including long term maintenance expenses, as outlined in the Maintenance Plan.