The Importance of a Sinking Fund
Section 19 of the Multi-Unit Developments Act 2011 governs the establishment and maintenance of a building investment fund, referred to as a ‘sinking fund’. It is essentially a rainy-day fund with a clear set of criteria for collection and spending.
A sinking fund is often seen by apartment owners as an additional yearly expense. However, it should be viewed as an investment in the building itself and therefore an augmentation of the asset. The MUD Act gives a guideline contribution of €200 per annum per unit. We would see this as a minimum investment, given that big ticket items will require significant funds.
Sinking funds are not to be used for day to day running of an Owner’s Management Company (OMC). When owners contribute to a sinking fund, they are setting aside money to be used strictly for the following type of works:
- Maintenance of a non-recurring nature
- Advice from suitably qualified persons
To put this into context, you may run into the following life-cycle issues over the course of your ownership of a property in a Multi-Unit Development:
- A roof will need major work on average every 15-20 years
- A lift carriage will need to be replaced or refurbished periodically
- Fire safety improvement may be required as building regulations change and safety standards increase
- Tarmac in car parks, depending on use, may need at least remarking and often resurfaced every 15-20 years
- You may need to engage a consultant on an issue such as planning, structural engineer etc.
- Intercom system replacement
- Redecoration of common areas
A schedule of dilapidation’s could be carried out by a building surveyor to help an OMC form their planned maintenance. We would recommend setting out such plan, either with or without the help of a surveyor, and working towards one big ticket item per year.
The sinking fund becomes asset of the Management Company. A healthy sinking fund is a bonus to your asset and will reflect well should you consider selling your property. On the flip side, a poorly funded sinking fund could raise a red flag in a sale. It is seen as an indicator of the health of the Management Company.
In our experience, use of sinking fund requires prior approval of the Board. Using the sinking fund wisely, can reduce the pain of a capital call while still leaving funds for the next item on the schedule of planned maintenance.
The OMC is always under pressure to deliver the best service for the development and while keeping cots as low as possible. The sinking fund should not be on the list for cost cutting.