A reserve fund levy should not be confused with a special levy. Special levies are normally raised for the funding of a specific project or an unforeseen expense and are normally raised over a certain period and linked to an end date. Reserve Fund levies do not have an end date, as it is linked to the annual admin and reserve funds budget of a scheme.
Reserve fund levies were introduced with the new Sectional Title Scheme Management Act 08 of 2011, its regulations and annexures, which can into effect on the 7th of October 2016.
The idea of reserve fund levies is in fact to reduce the need of raising onerous special levies.
Reserve fund levies should be raised in accordance with either one of the two provisions in the said Act and would naturally cover all major maintenance aspects of a scheme:
Reserve Fund Calculation: Option 1
The first option is as per Regulation 2 and is based on the current reserves the scheme is holding as well as the total annual admin levies raised. If the reserve fund at the end of the financial year is less than 25% of the admin levy income generated during that year, the scheme must provide for a reserve amount equal to 15% of the admin levy income for the new financial year.
Regulation 2 further stipulates that if the scheme’s reserve fund at the end of the financial year is equal to or more than the admin levy income generated during that year, the body corporate is not obliged to make provision for a reserve amount in the new budget; and should the scheme’s reserve fund at the end of the financial year be more than 25% but less than 100% of the admin levy income in that year, the body corporate must make provision for a reserve amount equal to the repairs and maintenance items provided for, in the new budget.
Reserve Fund Calculation: Option 2
Prescribed Management Rule 22 requires each scheme to compile at 10-year maintenance repair and replacement plan. This allows for a scheme to plan adequately in terms of maintenance and finances.
The requirements for such plan is clearly provided for in the Act and should consist of the following:
- A comprehensive list of all parts of the common property and any equipment used for maintenance that is expected to require maintenance, repair, or replacement in the next 10 years
- The current condition of each of these items (good, fair, or poor)
- The expected time when each item will need to be maintained, repaired, or replaced
- The service intervals for things like lifts and fire hydrants
- The estimated cost of this work, per item and
- The estimated further life of the item after maintenance, repair, or replacement.
Once you have compiled your plan, you would have also established the financial need over the next 10 Years. This amount is what you use to calculate the levy as per option 2. The Act even provides the calculation: [(estimated cost minus past contribution) divided by expected life].
Which option should the scheme choose?
These options should both be taken into consideration when calculating the reserve fund levy.
Option 1 (Regulation 2) will provide you with the minimum amount to ensure compliance with the Act but won’t necessarily be sufficient to cover the foreseen expenses as per the 10 Year Maintenance Repair and Replacement Plan.
Option 2 (PMR 22) will ensure that you are adequately covered for all foreseen maintenance expenses over the next 10 Years, as per a professional compiled plan, but might be the most expensive option, and resulting in a higher levy increase.
It is important that both these options, together with the plan, are presented at an Annual General Meeting.
These options should be explained to the members by a professional managing agent, like Lumineer, to ensure that owners are aware of the options and the results to make an accurate and informed decision.
For more information on reserve fund levies, the calculation thereof, and 10 Year Maintenance, Repair and Replacement Plans, contact Lumineer on info@lumineer.co.za
