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Strata Finance Explained

What is it?

When an owners corporation or body corporate needs money for renovation or rectification works, emergency repairs, green initiatives, insurance premiums, litigation or other capital requirements there are essentially three options to choose from:

  1. use money from a sinking fund
  2. raise a special levy
  3. take out a loan to cover the costs

All options are viable and should be considered depending on the circumstances but what if there is no money available in a 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 owners corporation or 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 owners corporations or 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 for funding of mechanical, aesthetic and structural repairs and improvements to buildings

Improved lifestyle

  • Strata financing can save time and expense plus provide complete certainty of funding
  • It allows repairs and maintenance to be completed immediately without further deterioration
  • Finance may offer greater flexibility and peace of mind that capital values and building standards are being 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 improve the value of an asset
  • For investors, rental and tenancy stability are enhanced

Who will benefit from strata financing?

The owners corporation or 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.

This Article was contributed by Janette Comish of Strata Loans.

Leave a Reply

  1. Lexie Ciolek

    to say owners could use moneys from a sinking fund ignores the requirement that if funds were not BUDGETED for in the sinking fund only raising a special levy or borrowing are the two options,
    There are not 3 options,

  2. Neal

    Some words of caution. In 2013 our Body Corp financed major ‘rectification works’ partly by drawing on the Sinking Fund and partly through a 5 year Strata Improvement Loan with a Major Bank. The initial interest rate was a little over 10 % pa when the official RBA rate was 2.75 % pa. As an explanation for a rate above 10% pa, owners were told by the Body Corp that this was because only a few banks offered these loans and there was therefore a lack of competition. While the interest rate in the loan contract was ‘variable’, today when the RBA official rate has fallen since 2013 by 1.25% to 1.50 % pa, the interest rate on the loan has only fallen by only 0.45% pa. Further in addition to owners having to repay the principal plus interest, owners also have to outlay a 10 % GST charge on the repayments of the loan ( a charge which is not of course payable on repayment of personal loans). The GST payment was never explained to owners when the Body Corp proposed the loan in 2013. For the duration of the loan to date since 2013, the Body Corp has provided owners with scant details of changes in the interest rate, the balance outstanding and when the loan is anticipated to have been fully repaid – and the Bank itself declines to provide information to any direct enquirers saying that the information should be sought from the Body Corp.
    Would welcome comments from others on their experience they have had with Strata finance and/or on the comments above.

  3. Business Working Capital

    Thanks for sharing this article. Strata finance is very interesting. I think that this article will definitely help me to understand it well. I think that I can use this to improve my business cashflow.

  4. Philip

    I am interested to strata finance. Thanks for sharing the benefits of it. I think that this will definitely help me with growing and financing my business. Thanks for sharing this article.