Managing a strata property comes with shared responsibilities, including shared financial challenges. Whether it’s funding urgent repairs or tackling a major capital works project, there are times when an owners corporation’s existing funds aren’t enough.
Borrowing money in an owners corporation (OC) comes with clear legal requirements, owner approvals, and processes to navigate. Below, we cover when an OC may borrow, how the process works, and what lot owners need to know before a decision is made.
Why Do Owners Corporations Borrow Money?
There are several circumstances when OCs may need to borrow money.
Most OCs, with the support of an experienced OC manager, can cover day-to-day financial needs through planning, budgeting, and foresight regarding upcoming expenses.
However, there may be times when even the most diligent financial planning doesn’t quite cover it. This is often due to significant issues such as:
- Emergency repairs: Particularly in the wake of natural disasters, such as flooding.
- Building-wide systems maintenance: Sometimes things like electrical wiring, plumbing or large service elements such as lifts need to be repaired or replaced unexpectedly. While many OCs have maintenance funds to cover this, those funds sometimes aren’t enough.
- Addressing ageing building needs: This may include roofing, window replacement, or repairing damaged or cracked walls.
- Adding significant upgrades: This may include car parking resurfacing, the addition of electric vehicle charging infrastructure, the purchase of nearby land or resources to support the strata building’s growth, or significant landscaping.
Each reason will have it’s own pros and cons, and that’s why the process to follow is carefully mapped out to ensure lot owners aren’t left out of decision making.
What is the Process that Owners Corporations Need to Follow When Borrowing Money?
When an OC has determined they may need to borrow money, it’s important to take a structured, transparent approach, and engage with lot owners early.
Step One: Clearly identify the need.
Document what the money being borrowed will be used for. Secure quotes from a few different providers for the needed service(s) to compare costs, and have them ready to provide to lot owners.
Step Two: Call a special general meeting.
Let lot owners know the purpose of the meeting and provide the documentation they need to make an informed decision about what the money is being borrowed for and how much. During the meeting, allow lot owners to ask questions before voting on a resolution approving the loan and the special levies required to repay it.
Step Three: Secure loan pre-approval.
Once lot owners are aware and in agreement, the OC can seek pre-approval for the loan and the loan terms. It can be beneficial to speak with a few different providers to identify the best options. Ensure these are shared with the lot owners to support transparency and decision-making.
Step Four: Secure the loan and manage repayments
With the lot owners agreement, the OC can formalise the loan agreement and proceed to use the borrowed amount for its intended purpose. Depending on the terms offered by the lender, the loan could be structured on an interest-only basis for up to 12 months, or as capital and interest repayments for the duration of the loan.
Important Advice For Owners Corporations When Borrowing Money
As with any loan, there are important considerations OCs need to take into account when choosing a loan and deciding whether borrowing money is the best next step.
Good faith applies
There’s no set limit on the amount that OCs can borrow, which is why they must always act in the best interest of the OC and lot owners. This includes declaring any conflicts of interest (for example, when securing quotes from businesses owned or part-owned by friends or relatives) and carefully documenting every aspect of the process for lot owners.
Financial auditing
OCs can be subject to audit, which is why it’s essential to maintain good documentation for the loan, including the full loan term, repayments, and interest. If your OC is Tier 1, you’ll have a financial audit annually. Tier 2 only requires an independent review, but it can be a good idea to upgrade to a full audit for transparency.
Navigating borrowing money and supporting good documentation processes can be tricky. This is where having an expert OC manager on hand can make a big difference.
The Above OCM team are experienced in handling all kinds of OC matters and supporting committees through the process with ease. If you’re looking for support with managing your OC, contact us today.
