Both maintenance fees and sinking funds relate to the upkeep of common property within strata developments, but the maintenance fee goes towards keeping a facility or service operational, while the sinking fund is used to replace, upgrade, or acquire an asset, mostly for unforeseen situations.
Why are these charges even a thing?
You’ve purchased a residence, moved in, and you’re now living the domestic dream – but after a while, the expenses needed to maintain a home start appearing. The garden starts looking wild and demanding regular care, the occasional light bulb goes out, even the plumbing eventually needs some looking at once in a while – and all that costs money.
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As the owner of most landed properties, you would be handling those issues by yourself – either with a tool in your own hands or in those of a hired professional. As the owner of a strata property (usually high-rises), however, the maintenance of the building in which your property is located, and the shared spaces within it, fall to the management corporation appointed by the community residing there.
What are these charges for?
The Strata Management Act of 2013 (SMA 2013) is the law that outlines how strata property owners and management corporations should operate, how the maintenance fees and sinking funds should be charged, and what happens to that money.
The monthly maintenance fees pay for security, landscaping, cleaning, the general upkeep of the kind of shared spaces one might find in a strata development, and for the salaries of the staff who manage all of the above. In the language of businesses, these expenses count as operational expenditure – and these expenses are only paid from the pool of maintenance fees collected.
The sinking fund can only be accessed with the express approval of the community, and can only be used for large-scale works such as renovations of common areas, repainting the building, or replacing critical components of the development such as water tanks – expenses that would qualify as capital expenditure in accounting parlance.
How do you tell the difference?
For a quick and easy analogy that illustrates the difference between maintenance fees and sinking funds, consider that for the management company, the maintenance fee and sinking fund are the equivalents of cash in hand and a rainy day fund, respectively.
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Maintenance fees are set as a certain monetary amount per square foot, calculated to include the projected operational costs of the development, and distributed across the total number of strata properties – in very much the same way a monthly income is spent on regular expenses such as rental, bills, and food.
The sinking fund is generally contributed by property owners at the rate of 10% of the maintenance fee and left to accumulate until needed in a separate account at about the same rate as a fixed deposit at a bank. Other than growing at an approximate rate of 2% per annum, another way the sinking fund grows is by way of proficient management and a healthy maintenance budget resulting in a surplus – a lot like your own rainy day fund.
(Written by Kevin Eichenberger, 9th December 2020)