Maximising Your Community Scheme's Reserve Fund says WatchProp

As a trustee of a community scheme, one of your most important responsibilities is the long-term financial health of your scheme. A key to achieving this is the effective management of the reserve fund to cover unexpected expenses and major repairs, helping to maintain property values and the quality of life within the community.

Understanding the Reserve Fund

The reserve fund is specifically set aside for future repairs, replacements, and other significant expenses not part of regular maintenance. This fund is vital for roof replacements, painting, and plumbing or electrical repairs to common property and other major expenses. Without a well-managed reserve fund, owners risk facing special levies or financial strain when these inevitable expenses arise.

Craig Coetzee, Managing Director of WatchProp, a leading property management company, says that providing a reserve fund in the community scheme's annual budget is often a matter of trying to predict a future unknown outcome. Many trustees prefer to keep levies affordable for owners and raise a special levy when the need arises for major repairs. 

The Sectional Titles Schemes Management Act of 2011 (The Act) changed the way community schemes are required to manage their finances.  Community schemes now need to have an ongoing reserve fund on top of a budget for administration and day-to-day expenses. This provision is for long-term maintenance requirements of the scheme and includes a 10-year maintenance plan, that projects major expenditure for the next 10 years. 

WatchProp offers some advice for managing the reserve fund:

Best Practices 

1. Regular Reserve Assessments: Regular assessments are essential to check the physical condition of community property assets and to estimate when major repairs will be due. Trustees can plan and budget accordingly, avoiding financial shortfalls.
2. Realistic Contributions: Ensure monthly contributions to the reserve fund are adequate. Underfunding the reserve can lead to financial distress while overfunding can burden residents unnecessarily. It's important to get the balance right.
3. Invest Wisely: Consider investing the reserve fund in low-risk, interest-bearing accounts. This helps the fund grow over time, reducing the need for a higher levy or special levies.
4. Transparency and Communication: Keep owners informed of the status of the reserve fund and the reasons behind any changes in contributions. Transparency builds trust and helps owners understand the importance of a healthy reserve.
5. Prescribed Minimum Reserve Budget: The Sectional Titles Schemes Management Act prescribes a minimum reserve fund budget. The provisions of prescribed management rules 22(1) and (2) must be read against the background of the prescribed minimum amounts that must be budgeted for in a scheme's reserve fund under Regulation 2 of the Act. While the maintenance, repair, and replacement plan offers a reasonable indication of the timing and amount of the body corporate's cash-flow requirements to maintain and replace its major capital items, and to offset the ongoing and accruing cost of such maintenance, repairs, and replacement, the amount budgeted for in the reserve fund cannot be less than the prescribed minimum.

Expert Advice

Coetzee emphasises the importance of reserve fund management: "Trustees who prioritise their reserve fund not only protect the financial stability of the scheme but also contribute to a higher standard of living for all residents. At WatchProp, we guide trustees to make informed decisions that ensure their community scheme's long-term success."

By following these best practices, trustees can maximise their community's reserve fund, and ensure their scheme is well-prepared for the future.