Buying And Living in a Multi-Unit Development Property in Ireland
4. Sinking Funds
4.1 Introduction
The sinking fund is money that is put aside every year from the service charges budget to cover the cost of major long-term expenses.
While the service charges budget is generally used to fund the costs of the day to day maintenance of the common areas, a portion of the budget should also be set aside to cater for periodical or long term structural repairs.
Before you buy, you should enquire from the estate agent or your solicitor if a sinking fund is in place/planned for the development.
4.2 What do sinking funds cover?
As regards the fundamental items that management companies should consider as part of their sinking fund calculations, it is difficult to be precise or definitive on the key elements required.
This is largely because factors such as the management company/surveyors views, building age and condition, usage, location, type of materials used will vary significantly from development to development.
Amongst some of the most common areas a sinking fund may cover are repair, refurbishment or replacement of:
- Building structure;
- Windows and walls;
- Roof and roof finishes;
- Internal partitions;
- Floor structure;
- Internal and External Decoration;
- Plumbing and Water services;
- Heating and Ventilating;
- Lifts and Escalators;
- Mechanical and Electrical Services and infrastructure.
4.3 Why should a sinking fund be established?
There is no legal requirement for management companies to establish and maintain a sinking fund.
However, it is advisable that all multi-unit developments should have a fund in place to pay for medium to long-term capital expenditure in respect of the maintenance and upgrading of the development and for the financing of non-recurring or unexpected additional expenses incurred in relation to common areas.
If no sinking fund is established, or, the level at which it is set is too low, the costs of any major refurbishment or repair work may have to be added to the annual service charge and may represent a very large once off payment for all owners.
Having a sinking fund in place reduces the likelihood that the management company may have to impose a once off major increase in the annual service charge.
Postponement of structural repairs to the common areas may add to the eventual cost of their repair and failure to carry out structural repairs may seriously affect owners' quality of life and the value of their unit.
It is in all owners' interests to have regard to the importance of a sinking fund. A well financed management company with a sufficient sinking fund should ensure that the development is well maintained and represents an attractive prospect to any potential purchaser.
4.4 How should a sinking fund be calculated?
The management company should obtain professional advice on the necessary sinking fund contribution each year.
A member of an appropriate suitably qualified professional body, e.g. an architect or a chartered surveyor, should estimate the sinking fund.
While the managing agent may assist in arranging consultation services with a professional to undertake a sinking fund estimate, unless they are qualified as a relevant construction professional, they will not be in a position to estimate the sinking fund level.
As with the service charge, the management company should outline the basis of calculation.
4.5 What factors should be considered in a sinking fund?
The sinking fund should be based on the existing condition of the property, its potential infrastructural liabilities and a planned maintenance programme.
Estimating a sinking fund requires that a detailed job specification is set out. This involves an expert assessment of the life of parts of the building and the likely costs of replacement or other works at the anticipated time of carrying them out.
The assessment would outline the key factors involved such as the intended lifespan of assets to be covered by the sinking fund, the estimated schedule of work, the lifecycle of structural materials and components and the type of building involved.
In this regard, the provision by developers of a capital assets register and the provision of quantitative and qualitative information on the materials used in construction is useful.
The projected sinking fund estimates would also rely on other factors such as the current state of repair of the building in question, current service provider and materials costs and inflation.
Read a checklist of possible sinking fund items.
(This list outlines some of the common area items that may need repair and or replacement. The list is not exhaustive as each development would require individual evaluation taking into account the current state of repair, age, lease details, etc).
4.6 What time period should the sinking fund cover?
It is difficult to put an indicative timescale on sinking funds i.e. what period of time they should cover - five, 10, 30 years etc.
The timeframe for a sinking fund depends on individual project specifics. Drafting an item and replacement timescale schedule is the most optimum method of deciding what time frame they should cover.
Assessing when key items are likely to need replacing and how much they are likely to cost is the best means of deciding how costs should be spread out across over time.
As far as possible, the sinking fund should relate to specifically identified expenditure (e.g. roof, boiler plant, lift etc.) bearing in mind the anticipated life cycle of the development rather than unidentified future liabilities.
With regard to estimating the longer-term expenditure to be met by the sinking fund, the directors could consider employing a chartered surveyor every 3-5 years to assess the short, medium and long-term maintenance issues which are necessary if the development is to remain in a state of good repair.
4.7 Where should sinking fund monies be held?
The sinking fund contribution is generally paid by owners as part of their service charge fee. While there are no specific rules regarding a company's banking operations, it is considered good practice for the directors to open and operate separate bank accounts for the service charges (current account) and the sinking fund (interest bearing account).
These accounts should be operated in the name of the management company.
Payments from the sinking fund account should require the formal approval of the directors.
The sinking fund should be clearly set out in the management company's annual financial statements as part of the balance sheet.
The annual accounts should detail contributions to and expenditure from the sinking fund account together with opening and closing balances and the amount of interest earned.