Sinking Funds In Apartments

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The vast majority of apartment developments in Ireland have not set aside adequate funds for maintenance and refurbishment according to a new report by the Society of Chartered Surveyors Ireland.

According to the study, three out of four property managers say less than 25% of apartment building have set aside adequate funding for such works.

In addition, almost 90% of managers say apartment buildings under their management – also known as Multi Unit Development or MUDs – have been forced to raise additional levies. This can arise when inadequate funds have been set aside and urgent spending is required.

The monies which apartment buildings set aside to refurbish and upgrade key services in a complex such as lifts, roofs, pumps, fire alarm systems, boilers, carpets etc are known as Sinking Funds.

The SCSI says if a complex has an inadequate Sinking Fund and is unable to undertake these projects, the standard of the property will reduce, residents’ living standards will be reduced and their health and safety may even be compromised.

The report, which is entitled, ‘Sinking Funds in Apartments – Meeting the Challenge’ involved the collection of data from nine large managing agent companies who provided data in relation to 632 MUDS containing 52,600 properties. It was launched ahead of the SCSI’s Property Management and Facilities Management conference which is taking place today (Wed 17th Oct) in Croke Park.

The lead author of the report Finbar McDonnell described the findings as worrying and said the issue needed to be addressed urgently, not just by Government, but also by individual apartment owners.

“The vast majority of property managers told us that the reason apartment buildings haven’t set aside sufficient funds is because property owners do not wish to pay increased service charges now, in order to build a Sinking Fund for the future.”

“In the MUD act 2011 it was suggested that all owners contribute €200 annually to a Sinking Fund. This guideline figure has been found in many cases to be much less than is required. Any future amendment to the MUD Act should make it a requirement that a dedicated Sinking Fund be established from year one.”

“For new MUDs we believe the Sinking Fund contribution should be included in annual charges to owners from the outset“ McDonnell said.

According to Census 2016, there are over 204,000 occupied apartments in the country. While the numbers are increasing and look set to increase further in the coming years, the SCSI believes apartment owners, estate agents and all other stakeholders need to be better educated about Sinking Funds and how having an adequately resourced one is in their own interests and represents an investment, not a cost.

A first step – Building Investment Fund Report

Building Investment Fund (BIF) Reports are used by Owner Management Companies – the bodies charged with managing MUDs – to quantify the cost of a building’s wasting or depreciating assets, the funding which will be required to maintain or replace them and hence the sums required by the Sinking Fund.

According to the study 6 out of 7 MUDs have not prepared a BIF. McDonnell says this ‘head in the sand’ approach is storing up huge problems for owners in the future and cannot continue.

“According to our study even the MUDs who have prepared a BIF report, only a minority are fully implementing its findings. The main reason cited by property managers as to why more OMCs had not undertaken BIF reports is that they believe the report is likely to recommend higher charges and they don’t believe owners will want these charges.”

“We believe the Minister for Housing, Planning and Local Government should stipulate that a BIF report must be prepared by an OMC every five years and that AGMs should take account of such reports in deciding on Sinking Fund annual contributions. The longer action is put off, then the more drastic the action which will be required. The non-payment of service charges in MUDs is a related issue which needs to be addressed and we recommend that changes be introduced to make it easier for OMCs to collect service charge arrears” McDonnell concluded.

Read the full report here