Can Strata Finance Assist Your Building’s Obligations under the Cladding Regulations

September 11, 2018

If you are living in strata titled building you may be aware that the Queensland Government has introduced new Regulations requiring certain buildings built or renovated after 1994 to register online and notify the Queensland Building and Construction Commission of the cladding materials used on the exterior of their buildings.

For some strata schemes, this may be a relatively simple and inexpensive process, but for others, this may be a substantial and expensive reporting and rectification exercise.The reports alone that may be required to be obtained as part of the compliance process could cost between $10,000 and $40,000.Following this, some buildings may be required to remove and replace some cladding in order to maintain the safety of residents.As recent examples in the media demonstrate, this rectification could run into millions of dollars.

It is fair to say that most schemes will not be financially prepared to deal with the impacts of this regulation on their buildings.Also, given the serious fines which can be imposed for missing the key deadlines in the Regulations, failing to do what is required is also not an option for bodies corporate.

With the Regulations commencing operation in October this year, bodies corporate should now begin their financial planning for how they will deal with the costs of the compliance program itself as well as any possible rectification costs.

Strata Finance Explained

What is it?

When a body corporate needs money for cladding rectification costs, essential fire services upgrades, renovation or rectification works, emergency repairs, green initiatives, insurance premiums, litigation or other capital requirements there are essentially three options to choose from:

  • use money from a sinking fund (only if included in the annual budget)
  • raise a special levy
  • take out a loan to cover the costs

All options are viable and should be considered depending on the circumstances but what if the budget was not allocated in the sinking fund? Special levies are not often the favourite choice of owners as they are required to find the money to pay for this unplanned expense. By choosing strata finance however, funds are provided directly to the body corporate and the expense is paid through levies over time thereby taking away the burden of a lump sum. Strata financing provides the ability to commence work immediately without the need to raise unpopular special levies or wait for enough money to accumulate in a sinking fund.

What are the benefits of strata finance?

There are many benefits of using strata finance including the following:

  • peace of mind
  • the loans are unsecured and offered directly to bodies corporate
  • by taking out a loan a strata community is reducing the immediate cost burden for works
  • funds can be accessed quickly once approved and projects can be carried out with minimal delay
  • cash flow is freed up
  • loans can be used to ensure that buildings are compliant and residents are safe now and pay for the upgrades later
  • improved lifestyle
  • strata financing can save time and expense plus provide complete certainty of funding
  • it allows emergency works, repairs and maintenance to be completed immediately without further deterioration or risk to heath and safety
  • finance may offer greater flexibility and peace of mind that capital values and building standards are maintained or improved
  • instead of doing small jobs as money becomes available, multiple repairs, maintenance or refurbishments can be bundled into one project, saving time and money whilst minimising disruption to owners
  • no large financial burdens
  • loan repayments are incorporated into quarterly levies/fees
  • there is no mortgage or personal guarantee required to secure a loan
  • increase the value of an owner’s asset
  • repairs and improvements will help maintain and may even improve the value of an asset
  • for investors, rental and tenancy stability are enhanced

Who will benefit from Strata financing?

  • The body corporate will benefit as they will be able to make decisions quickly and not need to drag out the process to raise funds for essential works.
  • The owners will benefit as they will not be lumbered with the burden of having to pay a hefty special levy. They will also see that the value of their asset is maintained and often improved.
  • The building will benefit from having works completed quickly and not experiencing further deterioration or inconvenience to owners.

The decision of which funding option your strata title uses will depend on the circumstances but you do have choices and should consider them all.

One of the biggest advantages of Strata Finance in relation to cladding compliance costs is that bodies corporate will have the freedom and flexibility of engaging the necessary contractors in a timely manner and not being prevented from doing the urgent works required to comply with the regulations because some owners may have neglected to pay their levies or special levies.

This article was contributed by Janette Comish of StrataLoans.