STRATA FINANCE A HOT TOPIC AFTER ALFRED LEAVES TOWN

The looming threat of Cyclone Alfred transfixed the nation for a few days back in March. After it hit, most of the country moved on, except of course for the Queenslanders directly affected by its damage.

I’ve been speaking with a lot of affected owners about their property, the damage and rectification, and many questions lead back to the money – how to best fund their building’s future.

As a former body corporate manager now representing Australia’s leading strata finance provider, these conversations mean a lot to me.

Queensland’s multi-unit properties create some of the best places to live in the world, but as Alfred reminded us, they can also have some big challenges for owners.

Insurance

Nationally, we are at the center of a genuine crisis in insurance affordability and it’s one that won’t improve in the near future.

We also have an ageing building stock as well as unforgiving weather and harsh coastal conditions that accelerate deterioration.

To make matters worse, too many recent builds are dealing with defects and developers in denial – a far too common scenario across Australia.

Insurance Renewal and the Call to Act

The conversation around funding and remediation works becomes urgent when owners are faced with a surge in insurance costs due to defects and outstanding remedial works. Our finance solutions address the immediate issue of paying the insurance premium while also helping to resolve the underlying cause.

An insurance broker may offer premium funding, a product aimed at helping businesses manage cash flow, but it is not well suited to strata. Insurance cover ceases if a monthly payment is missed and interest is quoted as a flat rate on the full premium amount, not just the residual loan balance as it is paid down.

Utilising strata funding as a solution means that when your insurance is next due, you will have hard evidence that remediation is in progress. This will change the attitude of insurers and help receive a reduced premium.

The Cost of Procrastination

Delays = Higher Costs

A common response of bodies corporates to needed repairs, maintenance and rectification is to kick the can down the road and ignore it. This may seem appealing, but it creates a false economy and a sense of comfort. Delays almost always mean higher costs.

One of the bodies corporates who borrowed from us initially voted down a $5 million loan to fund major defect rectification works. However, procrastination, delays and dysfunction forced the appointment of a compulsory manager. Following their appointment, the $5 million loan was secured. Then, due to the delays, cost increases and a blowout in the original scope, an additional $7 million was required to finish the project.

Even worse, because the rectification works were delayed, their insurance premium shot up from $90,000 to $300,000 with doubts about being able to renew it in the future.

All, or most of these extra costs could have been avoided with prompt action.

As this case shows, postponing critical work can lead to snowballing costs. Unfortunately, this isn’t an uncommon situation. Another client approached us for a $1 million loan but did not proceed. Eight years later, they took out a $5.5 million loan after a five-fold increase in the cost of insurance.

Funding Your Building’s Future

Finance is a Better Way

I work with owners and strata managers every day to help them make informed funding decisions. Nationally, the Lannock team and I also find that many people misunderstand how funding in strata works and the real long-term costs to owners.

The Queensland legislation adds to this problem, as it imposes a higher threshold for taking out a loan than for paying a special levy. For many, these hurdles are too high, and bodies corporate don’t consider the strata finance option, despite its benefits for owners.

Flexible Structure

Strata finance provides owners and body corporates with flexibility and the work can move forward without further delay. This flexibility allows body corporates to structure funding with terms up to 15 years, with funds to be drawn down during the availability period as the work progresses.  The body corporate can have an interest-only period of up to two years which helps with owners’ cash flows.

Investors benefit from strata loans because both the principal and interest payments are fully deductible against the asset’s income.

Owner occupiers should consider if a special levy is truly the best use of their funds given its immediate cash burden and impact on their personal finances.

Impact of a Strata Loan on Personal Finances

Depleting Owner Finances

In the past, very few bodies corporate looked at any option other than sinking funds to keep their buildings insured and properly maintained.

Even worse, because of this, too many have opted to defer major remedial projects due to the cost, despite clear evidence that the underlying problems would only get worse – and with it the burden.

Protect Personal Finances

Strata loans do not affect the personal credit ratings of individual owners. The debt is attached to the body corporate, not an individual owner. When a unit is sold, it is the new owner’s responsibility to pay the levies that service the body corporate’s loan.

A strata loan provides funding to protect and enhance your asset’s value, occupancy and rental returns. Unresolved defects will continue to deteriorate livability, rental returns and asset values.

The bottom line is that the most expensive option is doing nothing. Insurance premiums will only keep going up, as will remediation costs. Eventually, everyone will have to pay more.

If any of this describes your current situation, please reach out to me today as your local Lannock expert.

Article Contribute by Jason Triplett, Business Development Manager, Lannock Finance