You may have seen a line in your development’s annual budget for contributions to the sinking fund – but what is this and why does it matter?
A sinking fund is money earmarked for large-scale or substantial building projects that are carried out to keep your development looking good and working correctly. We refer to these projects as ‘major works’ and these can include things like redecorating the outside of your building, repairing the roof or replacing communal windows.
How is the amount calculated?
When calculating the amount to be taken, the property management company should take into account the potential replacement costs of certain items and the average length of time that passes before each type of repair.
By way of an example, a management company should consider the cost of replacing a door entry system of a property as well as the average amount of time before such a repair is usually required. This should then be calculated into a yearly figure and this figure will form part of the total yearly charge that each resident has to pay towards the sinking fund. Other examples of typical repairs and replacements that are taken into account and for which sinking funds are used include drainage, communal lighting, footpaths and certain access roads. Certain repairs which are considered minor are paid for by the service charge. Obviously such calculations can never be precise, but if all the different scenarios are considered properly, a sinking fund can mitigate the risk of incurring large costs on a property.
Benefits of a sinking fund
The main advantage of a sinking fund being collected as part of a service charge is that the expenses for repairs are pre-planned rather than a call for a large amount in one go which may come as a shock to leaseholders, some of whom may not have the funds to pay.
As well as the above, leasehold properties may be easier to sell if there is a sinking fund, which may avoid a buyer being overly concerned about major works expenses.
If you’d like to know more about your sinking fund, get in touch we the property managers at your development or apartment block.