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Saviour or scourge?
21 Jan 2021 12:00 am
YOU’VE READ IT A HUNDRED TIMES AND NO DOUBT HEARD IT AS MANY TIMES: A COMMUNITY SCHEME MUST BE RUN LIKE A BUSINESS – AFTER ALL, THE TRUSTEES OR DIRECTORS ARE MANAGING THEIR FELLOW-MEMBERS’ MONEY AND THEY HAVE A FIDUCIARY OBLIGATION TO DO SO DILIGENTLY, PRUDENTLY AND WITH AN ENHANCED LEVEL OF SKILL AND CARE.
Thankfully, the brutishly-nasty ‘early’ levy financing solutions offered by a few companies 10+ years ago, which were responsible for the financial ruins of numerous sectional schemes, have been done away with. These have been replaced with companies that offer a veritable smorgasbord of innovative and solutions-based finance options for community schemes.
Are body corporates allowed to take loans from finance companies?
Yes, they are. The members of the body corporate must pass a special resolution in terms of section 4(e) of the Sectional Titles Schemes Management Act to authorise the body corporate to borrow monies required by it in the performance of its functions or the exercise of its powers.
Is taking a loan preferable to raising special levy? Unequivocally no.
Whether any other community scheme is authorised to take a loan, or what type of resolution would be required to be passed, is set out in the founding documentation. Since the founding documentation of these schemes differ, we urge you to carefully study the documents before contemplating taking a loan.
However, as any businessman will tell you, loans have their place, and serve a particular purpose in the commercial world. However, there is always a price to pay (and usually a very expensive price at that) in the form of interest, finance fees, etc. which are not payable when special levies are raised and paid by members.
This article is written from the Consumers Perspective and should your community scheme require assistance in the form of a loan, we would strongly advise you to shop around, since there are numerous institutions in the market, offering different types of financial packages, each with distinct advantages and disadvantages attached. Many managing agents also offer loan facilities to their clients.
The most common types of loan facilities on the market are the following:
1. The levy finance company guarantees payment of the scheme’s monthly levy income, or a part of the monthly levy income, so that the budgeted monthly expenses of the scheme can be paid promptly and on time
The scheme then cedes its debtors’ book to the finance company as security.
The finance company is responsible for collecting any outstanding levies from defaulting unit-owners.
2. Specific Project Funding
This is where a scheme requires the funding for a large project, such as the waterproofing of the roof of the scheme, for example. Attending to the work now, would be far cheaper and more effective than budgeting and saving for the project over the next 3 years, where the condition of the roof would deteriorate and the cost of materials and labour, would concomitantly increase.
In this scenario, after carrying out a careful risk analysis, the levy finance company would loan the money for the full project price (or part thereof) to the scheme on mutually acceptable terms. These loans are usually granted as unsecured revolving loan facilities. Obviously, the criteria for approval are quite strict, but ultimately this is the most expeditious way to have work completed.
It goes without saying, that ultimately the finance company does not have the best interests of the scheme at heart – business is business after all – so it lies with the members and the scheme executives to ensure that if financing is taken out on behalf of the scheme, that the interests of all the members is protected as best as possible.