The annual budget: your roadmap to financial stability

“I wonder which way I ought to go!” – Alice in Wonderland.

Unlike Alice’s approach for a body corporate, its trustees, unit owners, and managing agents, managing a sectional title scheme making this type of crucial decision, requires careful financial planning. Creating an annual budget is much like planning a road trip, all of the stakeholders need to map out all necessary expenses, prepare for the unexpected, and ensure that the unit owners understand their financial responsibilities.

This guide will walk you through the key steps in budgeting for a body corporate, from understanding the legal framework, determining each owner’s contribution to the approval of the budget.

Budgeting for a body corporate starts with understanding the legal framework. The primary legislation is the Sectional Titles Schemes Management Act (“STSMA”) and the Regulations thereto.

• In terms of section 3(1) of the STSMA, your body corporate is required to establish and maintain an administrative fund and a reserve fund.
• The Prescribed Management Rules (“PMRs”) of the STSMA Regulations, assist in guiding the preparation and approval of budgets, providing clarity on certain items and ensuring they are revised annually.

Think of these as your road map – they ensure you’re on the right path to meeting all legal and financial obligations.

The Administrative Fund

Just as you would plan for fuel, lodging, and meals on a road trip, your body corporate’s budget needs to cover all necessary costs to keep the complex running smoothly. The budget is typically divided into the following components:

The Reserve Fund

The fund’s minimum threshold amount is determined in terms of Regulation 2 of the STSM Regulations.

However, similar to the discipline of setting aside money for a new car if your old one breaks down or for replacing other big-ticket items like tyres or brakes on a long trip, this fund is set aside to cover the costs associated with the 10-year maintenance, repair and replacement plan (“MRRP”) for major capital items that form part of the common property required in terms of PMRs 22 read with 24(2), which must:

• be prepared and updated by the body corporate and cover a period of at least 10 years;
• identify major capital items that will require maintenance, repair, or replacement during the period; and
• the estimated costs and expected life span of these items.

A major capital item is defined in PMR 2(i) as “wiring, lighting and electrical systems, plumbing, drainage and storm-water systems, heating and cooling systems, any lifts, any carpeting and furnishings, roofing, interior and exterior painting and waterproofing, communication and service supply systems, parking facilities, roadways and paved areas, security systems and facilities and any other community and recreational facilities”.

These items have a long lifespan but require a substantial amount of funds for maintenance, repair, and replacement.

Special Projects

These are additional expenses for planned improvements or upgrades, such as installing solar panels or upgrading security systems. These are your “extra stops”, the side trips, that make the journey more enjoyable. While not essential, they add value to your complex and should be clearly accounted for in the budget.

To ensure your scheme has enough “fuel” to make it through the year, it’s essential to accurately estimate the costs for each budget component Here’s how:

1) Look at historical data

Review past financial records to identify recurring costs and trends. This helps in predicting future expenses based on what has been spent in previous years.

2) Factor in inflation and price increases

•  Inflation: the South African Reserve Bank’s inflation target typically ranges between 3% and 6%. Use this as a benchmark when estimating costs.
•  Service fees: consider any contracts or services that might increase in cost. It’s better to overestimate slightly than to be caught off guard by rising expenses.

3) Bear in mind the Reserve Fund’s “emergency roadside kit” element

 In terms of PMR 24(5)(b) the trustees may approve using this fund for urgent unexpected repairs or emergency maintenance which could have been foreseen when the MRRP was prepared.

 4) Forecast income

The primary income stream for a body corporate is typically from levies collected from unit owners. However, your scheme may have other income streams such as rentals or benefits from a revenue-sharing model like our STS Outdoor fully funded advertising solution.

PMR 21(3)(d) also requires that a body corporate to invest any moneys in the reserve fund in a secure investment with any financial institution” as defined in section 1 of the Financial Services Board Act, which may result in an additional return.

Once the total budget is determined, it must be apportioned among the unit owners based on their participation quotas (“PQ”) unless this has been varied by the developer or the body corporate in accordance with section 11(2) of the STSMA. This process is akin to dividing the road trip costs among passengers based on how much space they occupy in the car. PQs are typically calculated based on the floor area of each unit relative to the total floor area of all units in the scheme. In simple terms, the bigger the unit, the larger the share of the budget that the owner will need to cover.

Remember when it comes to exclusive use areas (“EUAs”) section 3(1)(c) of the STSMA requires the body corporate to ensure that unit owners who hold the right to use and enjoy a EUA (whether it is registered or granted by rules) make additional contributions to the funds to cover estimated costs for that EUA, unless the rules provide that the owners concerned are responsible for such costs.

Before hitting the road, you need to make sure everyone agrees with the plan. Similarly, your body corporate’s budget needs the green light from both the trustees and the unit owners.

1)  Preparing the budget

According to PMR 26(1)(e), the body corporate is responsible for preparing budgets for both the administrative and reserve funds. These budgets should include itemised estimates of anticipated income and expenses for the upcoming financial year. It’s worth noting that these budgets may include discounts of up to 10% on annual contributions if members pay their dues on or before the specified due dates.

2)  Presenting the budget

Once prepared, these budgets are to be presented at the Annual General Meeting (“AGM”). This is a crucial step in the process, as it allows unit owners to review the financial plans for the coming year. Any discussions, objections, or suggestions should be documented in the minutes of the AGM. This transparency ensures that everyone knows what was agreed upon and why.

Once the budget is approved, the journey continues. But like any road trip, you need to check the map occasionally to make sure you’re still on course. Regular monitoring of your budget helps ensure that your body corporate stays financially healthy.

• Mid-Journey Adjustments

Imagine you’re near the end of your journey and realise fuel prices have increased. PMR 21(3)(b) allows for a quick adjustment. The body corporate can increase member contributions by up to 10% at the end of a financial year before the next AGM is held to adopt a new budget. These cover anticipated increased liabilities and remain in effect until members get notice of next year’s contributions.

PMR 25 ensures all passengers are aware of the adjusted contributions by requiring trustees to give notice of the increase to all members.

• The Cost of Falling Behind 

On the authority of a written trustee resolution PMR 21(3)(c) allows the body corporate to charge interest on any overdue contributions from members. Think of this as the ‘late check-in fee’ for your financial journey.

The interest rate has a speed limit – it can’t exceed the maximum rate set by the National Credit Act (2005). It’s compounded monthly in arrears, just like how delays can compound travel stress. Currently, the industry norm is 2% per month, compounded monthly.

This ensures all unit owners keep up with contributions, maintaining a smooth journey for everyone. Remember, it’s always best to pay on time to avoid these extra costs!

By following the steps outlined in this guide, you can create a budget that not only meets legal and modern requirements but also ensures the smooth operation of your complex.

A well-prepared budget is your roadmap to financial stability, helping to build trust among unit owners and ensuring your scheme is well-maintained and financially sound. So, as you set off on this journey, remember careful planning and regular check-ins will keep you on track and heading toward a successful year ahead.