HOW TO NEGOTIATE A REASONABLE LEVY INCREASE
At the end of every financial year, Homeowners Associations (HOA) and Body Corporates may choose to discuss and implement an annual levy increase. If you’re feeling as though the proposed escalation is unreasonable, you may raise your objections at the next Annual General Meeting.
For those hoping to negotiate a more reasonable levy increase, below are a few ways to ensure you have all the relevant facts together to make a more compelling argument.
Review the complex’s financial statements
It is important to note that HOAs are governed by the companies act, while sectional title units are governed by the Sectional Titles Schemes Management Act (STSMA). To review any proposed levy increase, the owner needs to look at the audited financials for the complex and then compare that to the proposed budget. The proposed budget can be changed at the Annual General Meeting (AGM).
Know how the reserve fund works
With Sectional title units, there is an administration levy and the reserve fund levy. The administration levy can be increased by up to 10% with the trustees instruction prior to the AGM. If it is bigger than 10%, it needs to be approved at the AGM. The Reserve Fund levy is determined by the 10-year maintenance plan for the complex. This plan is proposed to the owners at the AGM. Trustees review the 10-year plan before year-end and approve/amend the plan before the AGM.
According to the STSMA, one of the cases in which a body corporate is not obliged to increase levies is if the reserve fund at the end of the financial year is equal to or more than the levy income generated during that year.
On the other hand, if the reserve fund is less than 25% of the levy income, the body corporate must make provisions so that they can provide for a reserve amount equal to 15% of the levy income for the new financial year. This means that levies can be increased by 15% to supplement the reserve fund if it is below 25% of the total levy income.
When the reserve is between 25% - 99% of the levy income in that year, the body corporate should only make provision for a reserve amount equal to the repairs and maintenance items provided in the new budget. Simply put, they can increase levies by enough to cover the required repairs and maintenance to the common property that has been budgeted for within that financial year.
Compare levies of neighbouring complexes
Another tactic you might want to try is to find out what similar complexes in neighbouring suburbs are charging on their levies. If you can get a hold of the budget and financials of the neighbouring complex, you can compare it with your complex. Comparison can be done with suppliers. When doing this, just keep in mind that each complex has its own unique challenges (e.g. pool, laundry room, bigger gardens) that need to be taken in consideration. If the proposed levy escalation will make the levies in your complex higher than the levies charged by comparable complexes, you can argue that it’s in the greater interest of marketability and overall property values within your estate to keep levies as competitive as possible and the levy increase should therefore be reconsidered.
Seek advice from an area expert
If, after doing these calculations, you find that your body corporate or HOA is proposing escalations that fall beyond these requirements, it’s best to compile a convincing case for arguing against the proposed levy increase. Ultimately, levy increases are meant to be in the best interest of all who occupy property within a complex or estate. If ever you are in doubt about the proposed levy increase, you may request that the Body Corporate justify their decision. Each item of the proposed budget needs to be reviewed before the AGM. The hard questions need to be asked, such as: “Did we get three comparison quotations on suppliers” and “Are we saving enough for our 10-year maintenance plan?” Alternatively, you can reach out to your local real estate advisor or seek out the advice of a managing agent who specializes in complex management who can help you better understand whether your levies are fair.
*Advice sourced from Simon Steenekamp, Director at RE/MAX Town and Country.