Running a Reserve/Sinking Fund. Claire Bean MIRPM Michelle Emery MIRPM

Transcription

1 Running a Reserve/Sinking Fund Claire Bean MIRPM Michelle Emery MIRPM

2 We re aiming to cover:- Getting it right at the beginning When and how to review your fund Where you re a leaseholder too When it all goes wrong Dipping into the fund Useful hints and tips

3 Getting it right at the beginning Determine if it s a reserve or a sinking fund There are differences and so you need to know what you re dealing with. The model lease refers to a reserve. RICS guidance defines sinking funds and reserves as:- Sinking Funds are replacement funds build up to pay for repair and replacement of major items of plant and equipment. Reserve Funds are build up to equalise expenditure with regularly recurring service items to avoid fluctuations in the amount of service charge payable each year.

4 Getting it right at the beginning Where to get your asset information from New Sales Get life cycles and costings from Development. Use information on similar size and type of accommodation you manage. Existing stock/rtb/rta do you have an asset register? Talk to your Asset Management Team for life cycles and costings they hold. Take a look at the last cyclical decorations works as it can tell you a lot. Check your repair history. Surveys get a survey done. Get the information for the residue of the term so you have the whole picture. Remember the survey is not just a one off you should do this regularly.

5 Getting it right at the beginning What period of time are you going to save for? Most modern leases including the model lease refer to the collection of a reserve for the residue of the term. The residue of the term could be 99 years..it might be legal but is it affordable or reasonable? Is it worth saving for everything identified? Consider what you d likely deal with as a responsive repair or what you d deal with as part of the cyclical decorations. E.g. replacing power points in communal areas would you replace the lot in one go? More likely on a responsive basis. Fascia and soffit should be looked at as part of your cyc decs so consider scheduling replacement at the same time. You ll also save access costs.

6 When and how to review your funds Check you ve got it right Just because a fund has been around 20 years doesn t mean it was set up correctly and you re abiding by the lease. Check! Review them regularly We review them when we ve prepared the cyclical decoration specification so we have a fresh view of the condition of the building. Consider refreshing them every year after your year-end accounting is complete if you have reserves and can therefore charge a large repair to the fund to avoid an undue fluctuation you ll need to be clear you were expecting it if not then your fund might be short for the next planned job.

7 When and how to review your funds Keep a record of why you made a decision You might remember now or in 6 months why you made a decision but will you remember in 6 years? Keep a record of assumptions, alteration to life cycles (e.g. have you decided to collect for a lift over 30 years instead of the standard 25 years). Remember the F-tT can go back 12 years. Have you got a record of what you were saving for and why in 2003? Why not put all your assumptions into your reserve plans so they re there for anyone to see. Stagger your increases if your review means they ll go up a lot We have staggered increases where they ll rise by more than 15 a month. We try to keep increases to no more than 15 a month year on year.

8 When and how to review your funds Don t forget inflation You re setting your fund using current day prices. Things won t cost the same in 5 years let alone 15 or 25 years. You could use Retail Price Index (RPI) or Consumer Price Index (CPI). Both these track variation in the prices of retail goods and other items. We use the Construction Output Price for Repairs and Maintenance (previously the BIS Output Price Indices (OPIs) now managed by the Office of National Statistics (ONS)). These measure the price level of work being executed in the construction industry. They are the figures builders and contractors use. Update your prices for works every year using current rates/indices rather than front loading rates which are purely guesswork. Don t forget interest If you re earning interest pass it on but only include it when it s applied in the year-end account.

9 Where you re a leaseholder too Although there will be less of these type of situations in future, you re probably a leaseholder on some of your sites and pay a service charge to a managing agent. Some agents will hold a reserve (not usually a sinking fund) but it s highly unlikely it ll be fully funded. This means you ll have a bill which you then have to pass on. Consider including works in your plans which the freeholder/agent is responsible for. Your lease covers works for the terms and doesn t limit it to works only your responsibility. Talk to the agent to see if they ll give you any schedules they have for replacements and/or major works including cyclical decorations. Worst case scenario use your own experience on similar size and type blocks/estates.

10 When it all goes wrong

11 When it all goes wrong It doesn t cover all the costs A reserve or sinking fund doesn t have to cover everything although a common misconception by leaseholders is it s always fully-funded. The decision as to what you do or do not collect is yours. You could offer them instalments. Be cautious about anything on an individual basis and which extends over 12 months. You re getting into Consumer Credit territory and you ll need a licence. You could allow the fund to go into deficit. Not an ideal position but if you haven't been collecting for something which you know is wearing out you could be criticised for not considering affordability. If you re under-funded tell your leaseholders. Declare it on your sales enquiries.

12 When it all goes wrong Can t pay/won t pay You ll find some leaseholders will argue what you want to save is unaffordable. Ever heard the phase it s meant to be affordable housing? You won t please everyone. Be sure of what you re doing and why and ask yourself is it reasonable? The average fund contribution in London is 50 a month but this doesn't mean you aren t able to collect more than that. Again be sure of what you re doing. Record your decisions and be prepared to justify yourself. Consider getting an F-tT determination. The worst that could happen? You ll bill your leaseholder instead and they ll have to pay according to the lease.

13 When it all goes wrong I didn t know about the works when I bought This is another statement you may hear. It could be we ve not declared it on the sales enquiries or we ve not included it on the S125 /RTA3 offer. Check with whoever deals with your Section 20 notices. Have we sent any notices out about possible works? Include them in your S125/RTA3s. Check with Asset Management/Procurement. Have they got works planned to that block? Did we know about the need for the works when we completed the landlord s enquiries? If you ve not included major works on the S125/RTA3 offer you are restricted. Are the works essential or desirable? Can you postpone?

14 Dipping into the fund If you have an unexpected major repair/replacement and you can dip in be sure to review your fund and the impact. Will it deplete the fund? Will there be enough for the next scheduled works? Will it make contributions increase dramatically? If you have an unexpected major repair/replacement and you can dip in, be sure to review your fund and the impact. Consider:- Stagger your increases if it ll cause an increase. Part collect/part bill you could collect part of the costs of future works and part bill. Declare any under-funding in your landlord enquiries on resales.

15 Useful hints and tips Don t forget to include any major works on your year-end accounts Where you re going to bill out major works because you re underfunded it s not legally due unless it s accounted for. You can:- Include the sum in your estimated service charge for the year ahead or Bill it with your year-end. Be clear on your landlord s enquiries Make sure your Landlord s Enquiries explain any year-end deficit will belong to the incoming leaseholder. Their Solicitor should tell them this but if it s on your Landlord s Enquiries it s quite clear and indisputable.

16 Useful hints and tips On resales always recommend a retention is held This is where the outgoing leaseholder s solicitor retains some money in case there is a deficit at the end of the financial year. The incoming leaseholder would then have to instruct their solicitor to request payment of the deficit from the retention and pay it to you or refund them. You can tell the Solicitor to determine the retention using the last three years accounts. If they push you to state a figure then quote the full annual estimate. You might want to state this on your Solicitors Enquiries.

17 Help people to help themselves Always signpost LEASE ( CAB ( Solicitors, StepChange - previously the Consumer Credit Counselling Service ( National Debtline Benefits Online benefits checkers, benefit cap calculator In-house Welfare Benefits Advisors

18 Any questions? Claire Bean, Head of Leasehold Management MIPRM Tel: Michelle Emery, Head of Home Ownership (Income and Service Charges) MIRPM Tel:

19 THANK YOU Claire and Michelle