Funding common property expenditure in multi‐owned housing schemes

Abstract

This paper appraises the relative merits of the three main options to funding common property capital expenditure in multi-owned housing (MOH) schemes. The three approaches are: 1) raising funds from unit owners at the time a common property capital expenditure is required (widely referred to as a 'special levy'); 2) debt funding; and 3) accumulation of a fund from unit owners prior to common property capital expenditure. A set of criteria is advanced for appraising the relative merits of these funding options. At a generalised level of abstraction, it appears that the accumulation of a fund prior to capital expenditure represents the preferred option.

Quo Vadis Gold Coast? A Case Study Investigation of Strata Titled Tourism Accommodation Densification and Issues Arising

“…In addition to laying the basis for the creation of titles, strata and community title (S&CT) or ‘condominium’ laws set out mechanisms and parameters pertaining to the day-to-day and long-term management of such schemes. Arkcoll et al (forthcoming) highlight a fundamental challenge facing any multititled, including STTA, complex. This concerns the need for owners to develop a consensus position on challenging matters such as the extent and timing of fund raising to finance major expenditure directed to the refurbishment of common property infrastructure.…”

Service charge collection in multi-unit developments

“…There are two main ways to capitalise a sinking fund: the first is a cash contribution from the owners, usually via the annual service charge. This can occasionally be supplemented by the raising of a large, one-off contribution from unit owners (OMC members) at the time the common property capital expenditure is to be made; this is widely referred to as a 'special levy' (Arkcoll et al, 2013). Although a once-off levy may seem like a simple solution to any once-off funding requirement, there is always uncertainty over whether owners have the ability or willingness to pay such a levy.…”

“…This 'debt financing' refers to the OMC taking up a loan to cover the costs of repairs or other one-off expenditure. The problem with loan financing is that common property does not lend itself to use as loan collateral, as it is not normally possible to separate it from privately owned units (Arkcoll et al, 2013). It may be possible for individual unit owners to pledge their property as collateral, but as Lujanen (2010, p180) points out, 'It is understandable that not all owners are willing to pledge their dwellings for loans as collateral for certain types of major repair activity.'…”

Multi-owned properties in Australia: a governance typology of issues and outcomes

“…Researchers have highlighted some common governance practices and/or outcomes associated with poor governance in owners' corporations, including a lack of participation by owners in the owners' corporation and its committee (Easthope et al, 2014;Bugden, 2009); lack of attention to repairs and maintenance leading to dispute (Easthope, 2009;Lujanen, 2010;Randolph, 2006); financial distress due to lump sum capital expenditure for repairs and maintenance (Arkcoll et al, 2013); mismanagement by professional managers (Easthope et al, 2012;Yip and Forrest, 2002); undisclosed agreements between stakeholders, leading to conflict (Easthope et al, 2014); underestimated levies, leading to financial distress and accumulating budget deficit (Easthope et al, 2014;Johnston et al, 2012); unequal power relations and concentration of power by specific stakeholders (Easthope et al, 2012;Yip and Forrest, 2002;Blandy et al, 2006); conflicts of interest involving stakeholders (Easthope et al, 2013;Johnston et al, 2012); decrease in engagement and participation by owners (Easthope et al, 2013;Easthope et al, 2012); special levy funding, leading to adverse impacts on community harmony (Arkcoll et al, 2013 ); and legislative enforcement problems and lack of incentives to abide by the law (Easthope et al, 2014;Easthope et al, 2012). These practices and outcomes do not form a comprehensive list of the issues impacting MOP schemes.…”