Everything you need to know about paying levies
Most buyers who are considering a Sectional Title property know by now that they should first check how much the monthly levy is and what it covers before making an offer to purchase.
However, they should also ask for a copy of the conduct rules specific to the complex they are interested in, says Gerhard Kotzé, MD of the RealNet national estate agency group, because these may not be the same as the Prescribed Conduct Rules annexed to the Sectional Title Schemes Management Act (STSMA).
“The Prescribed Rules are a standard framework designed to ensure that the behaviour of owners and occupiers complies with various sections of the STSMA, but the trustees of Sectional Title schemes can – and often do – make additional rules to address particular issues or needs in their own schemes.
“In a complex with a swimming pool, for example, they may make a rule that it cannot be used late at night. They might also make a specific rule about how visitors’ parking is to be used, or a rule about how residents are expected to dispose of their garbage, or even a rule about what fines can be imposed for infringement of the other rules.”
Any such changes or additions to the Prescribed Rules do need to be approved and registered by the Community Housing Schemes Ombud before they can be enforced, notes Kotzé, “but even so, conduct rules can vary significantly from scheme to scheme, and prospective buyers really do need to check them out to see that they would be comfortable complying with all of them. It will be too late to object once they have bought their home”.
In addition, prospective buyers should ensure they are familiar with the approved Participation Quota (PQ) schedule for any Sectional Title scheme they are interested in, because in most schemes, this forms the basis of how the levies, reserve fund contributions, any additional charges and any levy increases are calculated.
Kotzé says the basic premise of Sectional Title schemes is that the levies and other costs payable by the homeowners in the complex should be in direct proportion to the size of each unit as a percentage of the whole scheme (the PQ).
“So if the unit for sale has a PQ of 0,26, for example, the owner will be liable for 26% of the total levy contributions each month. And if the scheme doesn’t have separate electricity or water meters for each unit, that owner will also be responsible for 26% of the total municipal bill for these utilities.”
“On the other hand, when it comes to the Annual General Meeting or any other meeting of owners that is called by the trustees, the ‘value’ of that owner’s vote will also be 26% of the total value of votes in the scheme.”
Calculating levies can be a bit tricky, but it is important that owners understand what is included in the levy and how the final amount is reached. Bjorn Laubscher, Managing Director of Mirfin Valuation Services offers a guide…
Reserve fund levy
The reserve fund is used to cover expenditure for the maintenance, repair and replacement of capital assets, such as roofing, exterior walling, roads, driveways and other common property structures. Also known as planned or preventative maintenance, the goal is to prevent deterioration and extend the life of these capital assets.
In theory, the reserve fund levy amount for the current financial year is determined as follows:
Reserve fund levy = [cost of planned maintenance activities] – [the reserve fund opening balance + interest earned on the reserve fund account]
When planning the levy for the current financial year, one should take a long-term view and ensure that it is sustainable from an inflation perspective but also sufficient for planned maintenance activities. The goal should be to plan ahead to avoid erratic levy fluctuations which can be caused by special levies. At the same time, the annual reserve fund contribution must meet the minimum amount prescribed by the Sectional Titles Scheme Management Regulations.
For optimal long-term financial management, trustees should draw up a cash flow projection that is based on the 10-year maintenance plan – this will indicate how much money will be available at the end of each financial year.
With a regularly updated long-term cash flow forecast in hand, the need for special levies or bridging loans can be eliminated.
Admin fund levy
The administrative fund is used for operational expenses such as management fees, insurance premiums, salaries and routine (not planned) maintenance activities. Routine maintenance includes activities such as replacing light bulbs, fixing a leaking tap, repairing a faulty gate motor, cleaning the pool, garden services, elevator maintenance and other related tasks. Other admin fund expenses typically include water and sanitation, electricity, refuse removal, bank fees, accounting, the insurance valuation, the 10-year maintenance plan, CSOS levies, etc.
These expenses must be budgeted for and approved at the AGM. Trustees can also take the same long-term approach as recommended for the reserve fund, i.e. projecting the cash flow for the admin fund over a 10-year period. This, together with the reserve fund cash flow forecast, will help the scheme to manage its finances successfully.
Kotzé says it is possible for the trustees and developers of Sectional Title schemes to decide to calculate levies and other charges according to a different formula, “but the majority continue to use the PQ schedule calculated when their scheme was built, which is why this is essential information for any prospective buyer – along with the scheme’s most recent audited financial statements, balance sheet and approved budget”.
In keeping with the disclosure requirements set out in the newly implemented Property Practitioners Act, all this documentation should be supplied by the seller or their estate agent, and if it is not, prospective buyers should not hesitate to ask for it, because the information it contains could very well influence their decision to make the purchase or not.
“For this reason, they should also not be satisfied with any excuses about certain information not being available from the trustees or managing agents, or with assurances that they will be provided with everything after they have signed the offer to purchase or taken transfer of the property,” he says.
“Indeed, if the information they need is not forthcoming, it should raise serious doubts about how well the scheme is being managed and funded, and about whether they should rather look at other developments.”