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How much is in your sinking fund right now? Have you accurately set aside this money to cover the lifespan of building elements?
A sinking fund is a fund created to set aside money to replace and repair major items. Getting it right will ultimately save you hassle and inconvenience in the long run. If there are insufficient funds available in the sinking fund to carry out necessary replacements, this may result in a levy being imposed on the members.
Your sinking fund should be carefully planned to accurately forecast how much is required to cover anticipated expenses to your property portfolio.
Your sinking fund should not, however, be used to cover the cost of routine repairs. It is advisable to ring-fence the monies in your sinking fund for its intended purpose.
The fund should adequately cover renewal and replacement costs, as well as future capital expenditure. When deciding on the amount to set aside, consider life-cycle issues which arise with buildings, for example:
The easiest way to build-up your sinking fund is to pay a set amount into it on a regular basis. When calculating that amount, you should include a contingency for unforeseen expenses that may arise.
Some frequently asked queries on sinking funds:
Q. Does the sinking fund belong to the property or the owners?
A. The sinking fund belongs to the property and should be held in a separate bank account to other service charge monies.
Q. Does a new buyer inherit the fund?
A. Yes, the sinking fund belongs to the property and not the owner.
Q. Who should pay into a sinking fund in multi-unit developments?
A. It is stipulated in the lease of the property as to who will bear the costs or payments into the sinking fund.
Q. Can a sinking fund impact the value of a property?
A. An established sinking fund is indicative of a well-run entity. A sinking fund is treated as a long-term asset on a company’s balance sheet and is often included as long-term investment.
It is vital to get your sinking fund right; as with all planning it’s important to revisit and re-evaluate your sinking fund at regular intervals.
For more information please contact our Property Manager Donna Barry
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