What Should Each Apartment Pay?

What Should Each Apartment Pay?

Property developers taking on their first apartment block will be confronted with the question: What should each apartment contribute to the overall strata budget?

For example, the apartment building you are planning to develop may be made up of 10 apartments, of varying shapes and sizes, and overall the strata needs $50,000 each year to pay for the expenses such as insurance, lifts, cleaning, maintenance, electricity and capital replacement.  How should the $50,000 of expense be shared?

One view is that all apartments are in the same building so all the owners should contribute equally – $5,000.   Nice and simple.  However, this view is flawed because not all apartments cause the same amount of expense.  For instance, a penthouse owner goes further in the lift each day, and so causes more lift expense.  The penthouse apartment is bigger and requires more paint.

Another view may be that bigger apartments cost more to maintain so they should pay more based on the size of each apartment.  Should a 120 m2 apartment pay twice the amount of a 60 m2 apartment? Again, this approach seems simple and fair.  However, the size of each apartment does not have a relationship to the amount of gardening costs.  The garden is the same size and costs the same amount, no matter how big the apartment.  All owners benefit equally from having manicured gardens and lawns.

Or should more expensive apartments pay more than the affordable apartments?  Is it fair that people who buy $1,000,000 apartments pay twice the strata levies of people who buy $500,000 apartments?  The ability to pay is not the same as being the cause of the expense.

These decisions about what each owner should contribute are not easy but making these decisions is part of the process of going to market with your development.  It can be a contentious decision and failing to apply the guiding principles correctly can cause problems later on, which is all the more reason to seek the advice of your strata development consultant.

The guiding principles your strata development consultant  will use do vary from state to state, and the terminology changes in each state, with some of the principles over-lapping.  It would be ideal if one day our state governments could get together and make some uniform land laws for all strata schemes in every state.  In the meantime, we need to battle on with each state going its own way.

The best analogy for what each apartment owner should pay to the overall strata budget is to consider the strata scheme to be like a company, with each apartment owner being like a shareholder in the company.  Each share (or apartment) is given a weighting which determines the proportional amount which each owner needs to pay towards the common funds held by the strata scheme.

The weighting given to each apartment may be called the contribution entitlement, the interest entitlement, the lot liability, or the units of entitlement – it all depends upon the state you are doing the development in.  The weighting will not only determine how much of the total you pay, but also may be the weight which your vote will carry when the common decisions are made at a general meeting of the owners.  The weighting will be calculated by balancing all the competing principles.

Here a simplified example:

Your strata development consultant will help you balance all the factors and  determine the weightings.

Here is a snapshot of some of the states:

Victoria:

In accordance with The Victorian Subdivision Act 1988 and The Owners Corporation Act 2006.

In Victoria the Owners Corporation budget is divided amongst lot owners based on Lot Liability, which is determined by a Land Surveyor when the initial plan of subdivision is being set up. Establishing the number of units of liability for each lot is based on a combination of factors including the size of the apartment and the price the apartment will be sold for off the plan.

NSW:

 In accordance with the NSW Strata Scheme Management Act 2015.

In NSW, units of entitlements are set up by a valuer. This is usually based on an estimate of the market value of each lot at the commencement of the scheme.

If ever there is a requirement for an adjustment of unit entitlements, it can be achieved through an order reallocation of unit entitlements. The basis for a reallocation is on value and a registered valuer must obtain physical access to every lot to determine the back-dated market variation.

Queensland:

In accordance with The Body Corporate Community Management Act 1997

When a body corporate scheme is established, lot entitlements are initially set by the original owner on the advice of the strata development consultant. There are 2 types of entitlements.  One is the interest entitlement which is based on market value and the second is the contribution entitlement.  There are 2 principles that your strata development consultant will generally use to determine the contribution entitlements – either the equality principle or the relativity principle.  These principles are explained in the Body Corporate and Community Management Act.

SSKB’s developer consultants have the knowledge to advise on what each apartment should contribute to the overall strata budget for your development. Click here to contact us today.