How trustees can get ahead of insolvency
Residential sectional title is currently the fastest growing property sector in SA, with changing lifestyles and affordability constraints prompting increasing numbers of home buyers and investors to opt for apartments and townhouses rather than freehold homes.
“Sadly, though, the number of sectional title (ST) schemes that are struggling to stay solvent is also rising rapidly, and owners in those schemes are at risk of losing their investments unless their trustees take swift action to remedy the situation, says Andrew Schaefer, MD of national property management company Trafalgar.
ST schemes can get into financial difficulties for many reasons, the most common of which are the under-recovery of levies over a long period and the sudden receipt of a very large account for the actual rather than estimated consumption of municipal services such as electricity and water. Low emergency reserves and undetected overcharging by local authorities are also fairly common.
“But whatever the reason, the consequences for owners in a scheme that is ‘technically insolvent’ - in the sense that its liabilities exceed its current assets – are potentially very serious,” he notes. “Maintenance is likely to be neglected, resulting in buildings and complexes becoming unsightly and possibly even unsafe. Security and other services may be suspended due to the non-payment of accounts.
“Worst of all, banks are very unlikely to grant any new bonds to potential buyers in such schemes after looking at the audited financials, so existing owners will probably not be able to sell and the value of their homes will plummet as a result.”
Consequently, trustees who feel that their ST schemes are heading for trouble should take action as soon as possible, says Schaefer. “And the good news is that we can help them to plan and execute a turnaround strategy that will in most cases save them from having to apply for the scheme to be placed under legal administration.”
This assistance begins with the compilation of a professional report that accurately states the scheme’s current financial position, along with a clear diagnosis of the problems it is experiencing and the proposed solutions, he says, “and on the basis of this the trustees should consider having us come in to help implement these solutions.
“If the main problem is high or unexpected municipal charges, for example, we will need to check that the correct tariffs are being applied to the ST scheme, ensure that the scheme’s own utility recoveries are correct and eliminate any waste through leaking pipes, for example, or illegal consumption by way of bridged meters.”
Careful budgeting, cash flow forecasting and monthly management reporting are further essential elements of most rescue plans, Schaefer says, “and while a turnaround can sometimes take years, a positive result is definitely possible when there is commitment to clearly defined objectives and sustained good management.
“Most trustees would also agree that this course of action is definitely preferable to the scheme being placed under administration, when the administrator becomes the only one to decide what action needs to be taken and will often just impose a special levy. And certainly, the property values will be preserved by adopting a pro-active and intensive approach to turning around an insolvency situation.”