Zero Interest on Sinking Funds

​Before the change of name to Capital Works Fund has even sunk in, Strata managers are being asked the tough questions by committee members.​

Strata Managers are trying to increase non-management fee revenue per scheme. However, there is a case for getting the basics right first.

A capital works plan is required, but how many of these are real working documents which are referred to by the strata manager at each AGM?

Does the strata manager know the interest rate on funds? Or even how much is in the sinking fund?
​

Let’s take three real life situations from the past month. These examples are from different strata management companies across small (10 lots), medium (40 lots) and large (140 lots) strata schemes.

Example 1
A new treasurer of a scheme with less than $20,000 available sends an email request to the strata manager “Can you tell me the interest rate on the sinking fund?” and gets the following response:

"As the funds are only in a trust account and not an investment account there is no current interest on the account as the funds are under $50,000."

Example 2
Strata Committee member asks the strata manager what the interest rate is on the sinking fund at the AGM. Strata Committee member is given a blank stare and an action item is noted down to follow up. When the strata manage didn’t follow up, an email follow up by the strata committee member resulted in this response:

"I spoke to accounts and to answer your below questions, there is no interest earned or fees paid to either admin or capital accounts (as it is essentially the one account).
 
An investment account can be opened with the below terms and interests;
 
3 Mth – 2.10%
4 Mth – 2.15%
6 Mth – 2.2%
12 Mth – 2.30%

Also, <strata manager company> only deal with <big bank> as it downloads into the software used for Strata Management."

Example 3
In a larger strata scheme with $1.5 million balance, an email was sent to the strata manager requesting the interest rate on the sinking fund.

"The Strata Plan is currently getting between 2.52% and 2.60% on term deposits. Hope this is sufficient information."

After seeing these responses, the real question posed is how strata managers can provide value-added services around capital management. 

Simple recommendations could be: investing part of the sinking fund in an offsite solar farm could provide up to an 8% p.a. return and offset the carbon emissions of the building.
​

Source: Common Capital, May 2015

Energy efficiency in the common areas can provide a 30% internal rate of return in a high-rise building or a 56% internal rate of return in a medium sized strata according to a report commissioned by Office of Environment & Heritage in May 2015.*

As we can see, when it comes to the capital works fund, quite often the only thing that is left sinking is Owners’ hearts.

* Residential multi-dwelling EUAs in NSW: Feasibility Study into the potential application of Environmental Upgrade Agreements in Residential Contexts. Common Capital, May 2015.​
​
 
Brent Clark
CEO, Wattblock

Strata managers can now register buildings in the City of Sydney and in Melbourne for a fully funded electric vehicle recharge assessment. Registrations for Brisbane have closed. However, if you're interested in learning more contact Scott Witheridge on (02) 9977 1801. Read more about the program here.