Is a low capital works fund a red flag?

A low capital works fund is often a red flag, but not always. What matters is how the balance compares with the building's 10-year capital works plan. A small fund in a young building with little work due can be fine. A small fund in an older building with roofs, lifts or waterproofing due in the next few years usually means a special levy is coming, and as the new owner it may be yours to pay.

What the capital works fund is

Every NSW strata scheme collects two kinds of regular levies. The administrative fund pays day-to-day costs such as insurance, cleaning and the strata manager. The capital works fund saves for major repairs and replacements: roofs, lifts, facades, painting, waterproofing, driveways and fire safety upgrades.

NSW strata schemes must have a 10-year capital works plan that estimates what major work will be needed and what it will cost, and it must be reviewed at least every five years. The owners set the capital works levy each year with that plan in mind.

How to tell whether the fund is low

There's no right number. A balance that's healthy for a block of six can be tiny for a tower of 200. Instead, compare three things in the strata records:

1. The fund balance and the plan

Find the capital works fund balance in the latest financial statements, then find what the 10-year plan says needs to be spent in the next three to five years. If the work due soon costs more than the fund holds plus what levies will bring in, there's a shortfall.

2. Whether the plan is up to date

A plan more than five years old, or one that doesn't mention the defects in recent reports or minutes, can make the fund look healthier than it is. Check the date on the plan.

3. What owners have been doing

Read the minutes of the last two or three years of meetings. Look for:

• Owners voting to keep levies low, or to cut the capital works levy
• Repairs that were discussed and deferred
• Quotes for big work with no matching money in the fund
• Money moved from the capital works fund to cover day-to-day costs

Signs it's a red flag

• Major work is due in the next few years and the fund can't cover it
• The 10-year plan is out of date, or there isn't one
• Repairs keep being deferred from meeting to meeting
• Defects such as leaks, concrete cancer or failed waterproofing keep coming up
• Other owners owe levies, so less money is coming in than budgeted
• The owners corporation has taken out a strata loan

Signs it may be fine

• The building is young and little major work is due
• The fund recently paid for big work, such as a roof or a repaint, and is rebuilding
• The 10-year plan is current and the levies have been set to match it
• The minutes show work being done on time rather than put off

Why it matters to you as a buyer

When the capital works fund falls short, the owners corporation has three choices: raise a special levy, take out a strata loan, or delay the work. A special levy can cost each owner thousands or tens of thousands of dollars. A loan raises everyone's levies for years. Delaying the work usually makes it more expensive later.

Under the standard NSW contract, a special levy decided after the contract date is usually the buyer's to pay. Our guide to special levies in NSW explains how the timing works and how to work out your share.

Questions to ask the strata manager

• What is the capital works fund balance today?
• When was the 10-year capital works plan last reviewed, and does it include the defects in recent reports?
• What major work is due in the next five years, and how will it be paid for?
• Is any special levy or strata loan being considered?
• Are any owners behind on their levies?

Questions

What's the difference between a sinking fund and a capital works fund?

They're the same thing. "Sinking fund" is the old name, still used in some other states. NSW law has called it the capital works fund since 2016.

Is a big capital works fund always good?

It's a good sign, but compare it with the plan. A large fund can still fall short if a lift replacement or major waterproofing is due soon.

Can I see the capital works plan before I buy?

Yes. It's part of the strata records. It's usually included in a strata report, or you can ask the strata manager. If the plan isn't included, ask for it before you exchange.

Keep reading

• How much does a strata report cost in NSW?
• Should you buy an apartment with a special levy?
• Can ChatGPT review a strata report?
• Strata by-laws to check before you buy in NSW

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