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The current level of the Sinking Fund

Jack_92

I'm in the middle of purchasing an apartment and my solicitor provided me with a report from the Management Company, which indicates that the current level of the sinking fund is over 33k. There is approx. 25 apartments in the development, which was built around 2005. I was informed by our solicitor that I should satisfy myself that the fund is at an appropriate level in all of the circumstances.

Is it something I should be worried about? 33k doesn't seem to be a lot considering that the management fees are over 2k annually per property?

Thank you

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Victor

It could easily take €100,000 to replace a lift, which is probably due major work in the next 10 years. €33,000 is not enough for that, never mind any other work.

endacl

Jack_92 wrote: »

I was informed by our solicitor that I should satisfy myself that the fund is at an appropriate level in all of the circumstances.

Just ran the bolded part through Google Translate (solicitor to english).

It came back as: 'The sinking fund might as well be zero. Run away!'.

antoinolachtnai

endacl wrote: »

Just ran the bolded part through Google Translate (solicitor to english).

It came back as: 'The sinking fund might as well be zero. Run away!'.

It is easy to say this. But it is more complicated than this.

You need to look at the rate at which the fund is increasing in size. If it is increasing by €15k/year say, it is probably ok.

You need to look if there is other stuff on the balance sheet. If there are service charges outstanding, for instance, the inflow of these fees in the future will make cash available (on the other side a high level of outstanding service charges is a bad sign).

godtabh

Also what work has been done to date

Caranica

Victor wrote: »

It could easily take €100,000 to replace a lift, which is probably due major work in the next 10 years. €33,000 is not enough for that, never mind any other work.

Unlikely to be a lift in a development that small?

OP the MUD suggests that at least €200 per unit should be put into the sinking fund per year so your fund is about 6 years worth.

Look around at what might cost serious money, has the development been painted recently? Does it have a lift/electric gates/fountains? Are you satisfied that fire safety work will not be needed?

The fund could be fine, or woefully inadequate. We can't give a blanket answer.

Baby01032012

Above post is very good advice.

200€ per apartment per year is standard. 2000€ pa does that include the sinking fund contribution as it appears high for just service charges. Ask the OMC for a history of the sinking fund. Have they had to dip into it for repairs and maintenance. Look at the general state of the block. The level of disrepair is a good indication if the annual budget is adequate. Is there an appointed block agent or is the OMC self managing to reduce costs. Get yourself last set of financials from the CRO and see what level debtors are at compared to previous year, any high legal charges that would indicate OMC are taking debtors to court. Talk to the other residents.

voluntary

Victor wrote: »

It could easily take €100,000 to replace a lift, which is probably due major work in the next 10 years. €33,000 is not enough for that, never mind any other work.

Cannot the community simply borrow from a bank and pay back over 5 or 10 years for such major works?

antoinolachtnai

voluntary wrote: »

Cannot the community simply borrow from a bank and pay back over 5 or 10 years for such major works?

I think it would be very difficult indeed for a management company to raise finance from the bank. There may be legal problems too.

3DataModem

A bank will almost never lend to a management company (as the company can easily welsh on the debt with virtually no available recourse), they will encourage the homeowners to borrow personally. This is better TBH as homeowners will pay the debt a lot faster than a large management fee.

voluntary

antoinolachtnai wrote: »

I think it would be very difficult indeed for a management company to raise finance from the bank. There may be legal problems too.

It must be the way the system is setup. It's normal in many places for the community body to raise funds. It's probably a different structure from a management company, not really sure how this works. If you look up around the world larger investments in the current apartment blocks or complexes is not normally funded by savings, but by credit. Residents pay it back by a small topup to their management fees (just not upfront)

voluntary

3DataModem wrote: »

A bank will almost never lend to a management company (as the company can easily welsh on the debt with virtually no available recourse), they will encourage the homeowners to borrow personally. This is better TBH as homeowners will pay the debt a lot faster than a large management fee.

To raise money from homeowners one by one would be a nightmare and administration would prove costly and ineffective. You'd need to have a body representing homeowners and this body borrowing money and paying it back. Homeowners dealing with the body. That's how it normally works.

happyfriday74

OP the MUD suggests that at least €200 per unit should be put into the sinking fund per year so your fund is about 6 years worth.

Thats the standard but its often woefully inadequate as all buildings are built differently. €200 per unit might be overkill for a stand alone house in well landscaped private estate but well short of what needed for a fancy apartment development with lots of lifts. Its a decent rule of thumb though.

The fund should be 70k going by the 200 per unit a year rule.

1.They have used some of the fun already for sinking fund expenditure- not bad
2. They only got their act together setting up the sinking fund in recent years/or neglected to contribute to it during the bust when they should have been doing this from the start- not ideal but not unusual.
3. They are having funding issues and are dipping into the sinking fund to run the development - this is not permissible use of sinking fund monies- check the debtors on the accounts and this could give you a strong hint.

The_Conductor

Is there a good reason why the sinking fund is so low (particularly given the higher than average management charge).
You need to get further information- however, offhand- such a low sink fund, esp. in the presence of such a high management charge- means there must have been some sort of an event behind this- that you've not been told (thus far).

Get further information- make a decision when in possession of the facts.

DelBoy Trotter

Caranica wrote: »

Unlikely to be a lift in a development that small?

I lived in an apartment complex of 55 apartments which had 4 lifts!

Caranica

DelBoy Trotter wrote: »

I lived in an apartment complex of 55 apartments which had 4 lifts!

We have 81 and no lifts! All down to building heights I guess

antoinolachtnai

voluntary wrote: »

To raise money from homeowners one by one would be a nightmare and administration would prove costly and ineffective. You'd need to have a body representing homeowners and this body borrowing money and paying it back. Homeowners dealing with the body. That's how it normally works.

The first problem is that the apartment management company is not entitled to enter a contract for longer than three years. The second problem is that absent personal guarantees, the bank would have no meaningful collateral.

The MUD act provides for collecting such charges from the homeowners once a budget is approved.

Del2005

Caranica wrote: »

Unlikely to be a lift in a development that small?

For a €2k service charge there'd want to be a lift, underground car park and electric gates. Otherwise they are spending huge money on the service charges for nothing, especially with the sinking fund is so low.

If there is no lift, underground carpark or electric gates then either something massive has been done or has to be done. Why else would the service charge be that high? Is there signs of recent work?

The_Conductor

Del2005 wrote: »

For a €2k service charge there'd want to be a lift, underground car park and electric gates. Otherwise they are spending huge money on the service charges for nothing, especially with the sinking fund is so low.

If there is no lift, underground carpark or electric gates then either something massive has been done or has to be done. Why else would the service charge be that high? Is there signs of recent work?

Multiple insurance claims- could hike the insurance for the development and make it impossible to change insurer- this might eat up an improbable amount of the 2k management charge.

Issue though- we simply don't know.

Also- I can show you several developments in the greater Dublin area- with management charges of >2k- that don't have lifts, electric gates, CCTV or other niceties.

We simply aren't in a position to advise the OP.

SozBbz

OP no one can tell you whether or not 33k is enough. To me, it doesnt sound terrible, but then again sinking funds could always be bigger.

I live in a development of 85 units roughly and out sinking fund proportionally is lower than yours (per unit). However there are probably economies of scale at play and the nature of the development is important too.

Approx 50 of our units are apartments/duplexes, with the remainder being 3,4,5 bed houses.We have actually got 2 sinking funds - one for all units and one for apartments and duplexes only. The houses pay a lower management fee but pay for their own insurances and maintenance (like gutters etc) so our liability to the house owners is less. Effectively they pay towards the grounds and bins and public liability insurance, but not much more.

We had one issue a number of years ago where some funds were taken from the sinking fund to soften the blow. Since that extraordinary event, we've been dealing with everything else through current expenditure and building the fund back up.

We also don't have and lifts or electric gates to contend with. We also don't have any serious issues with owners not paying their dues. So all in all, I think our fund is sufficient.

So if I were you I'd consider the following;

1. Age of the development - if its quite new and built since 2014 building regs I'd be more confident.
2. Composition of the development - is it a block of apartments or is it a mix of different unit types? Are there major pieces of equipment that will need to be repaired/replaced over the longer term? Gates/Lifts primarily.
3. Level of payment from the owners - are the vast majority paying on time? This is really important because if not, there could be issues wtih the OMC being able to spend on maintenance throughout the year.

Your solicitor isn't going to tell you whether this is good or bad, they will simply relay the facts. Theres no single right answer, its a judgement call so they're not going to stick their necks out to say its sufficient for all eventualities. The best you could ask for is how it compares to other purchases they've worked on.
.

Jack_92

Del2005 wrote: »

For a €2k service charge there'd want to be a lift, underground car park and electric gates. Otherwise they are spending huge money on the service charges for nothing, especially with the sinking fund is so low.

If there is no lift, underground carpark or electric gates then either something massive has been done or has to be done. Why else would the service charge be that high? Is there signs of recent work?

There are three lifts in total, underground car-park with electric gate. I assume that's why the service charge is so high.

I informed our solicitor that we would like to review a full history of the sinking fund / balance sheet and to check if there any outstanding service charges. I also asked what work to the development has been done to date using sinking funds and asked to confirm how much money the management company puts aside annually from the service charges toward the sinking fund from each of the property owner.

I hope it will clarify some of my concerns and help me to make a decision.

SozBbz

Jack_92 wrote: »

There are three lifts in total, underground car-park with electric gate. I assume that's why the service charge is so high.

I informed our solicitor that we would like to review a full history of the sinking fund / balance sheet and to check if there any outstanding service charges. I also asked what work to the development has been done to date using sinking funds and asked to confirm how much money the management company puts aside annually from the service charges toward the sinking fund from each of the property owner.

I hope it will clarify some of my concerns and help me to make a decision.

Humm... 25 units paying for the upkeep of 3 lifts is quite a lot - you'd wonder why the developer put in three, when 2 would probably have been plenty, however it is what it is. With that, underground parking and gates, I'm not surprised your fees are €2k per year.

When was the development built OP? is it possible the sinking fund is at the level its at because its only been in place for a short few years.

happyfriday74

Humm... 25 units paying for the upkeep of 3 lifts is quite a lot - you'd wonder why the developer put in three, when 2 would probably have been plenty, however it is what it is. With that, underground parking and gates, I'm not surprised your fees are €2k per year.

Some architects love lifts. Once saw a plan for 50 units with 11 lifts. Looked really pretty on an A1 drawing but heaven forbid that service charge!

Mad_maxx

Jack_92 wrote: »

I'm in the middle of purchasing an apartment and my solicitor provided me with a report from the Management Company, which indicates that the current level of the sinking fund is over 33k. There is approx. 25 apartments in the development, which was built around 2005. I was informed by our solicitor that I should satisfy myself that the fund is at an appropriate level in all of the circumstances.

Is it something I should be worried about? 33k doesn't seem to be a lot considering that the management fees are over 2k annually per property?

Thank you

Most sink funds haven't the half of that

Victor

happyfriday74 wrote: »

Some architects love lifts. Once saw a plan for 50 units with 11 lifts. Looked really pretty on an A1 drawing but heaven forbid that service charge!

Or the capital cost. Had a project of 500 apartments with 40 lifts. Changing from 2 apartments per landing to 4 removed 20 lifts - about €1m at the time.

Franz Von Peppercorn

The Mud act regarding sinking funds was published in 2011 and came into effect the next year iirc. The sinking fund for this year probably hasn’t been collected yet. 6 years.

So 200 * 6 * 25 = 30k.

Jack_92

SozBbz wrote: »

Humm... 25 units paying for the upkeep of 3 lifts is quite a lot - you'd wonder why the developer put in three, when 2 would probably have been plenty, however it is what it is. With that, underground parking and gates, I'm not surprised your fees are €2k per year.

When was the development built OP? is it possible the sinking fund is at the level its at because its only been in place for a short few years.

It was built around 2008

hmmm

I'd want to find out how many of the 25 are fully paid up on management fees. Less than 22 would concern me.

Then I'd want to find out (like you are doing) how much is going towards the sinking fund. Lots of apartments would only have got their act together in recent years - personally I'd be fine with that as long as things seem to be on track.

On a general point, I'm very happy to see a high management fee if there is a substantial part going towards a sinking fund. Again it just shouts "well run and responsible" to me. If you're in a complex you can either save now via a sinking fund, or pay later.

antoinolachtnai

It is important to understand what is going on here. The solicitor would send you this advice even if there were ten million euros in the sinking fund. He is doing this to make clear that he will not carry out economic and fiscal due diligence for you (if only because he is not qualified to do so or even to offer professional advice in relation to it).

happyfriday74

It is important to understand what is going on here. The solicitor would send you this advice even if there were ten million euros in the sinking fund. He is doing this to make clear that he will not carry out economic and fiscal due diligence for you (if only because he is not qualified to do so or even to offer professional advice in relation to it).

Exactly this.

He is stating the position but is not qualified to advise you on sinking funds etc.