A financial solution for levy default in community schemes

Oct 19, 2021 | Debtor Finance

Good financial management and a balanced cash flow are the keys to running a successful community scheme. Community schemes rely on property owners to pay their levies so that they can keep the cash flow balance. However, the reality is that property owners can default on their levies and leave the community scheme in a jam. Thankfully, there is a financial solution from Propell for community schemes that find themselves in this situation. 

What are body corporate levies used for?

The body corporate needs to maintain the communal property in the community scheme to prevent mishaps like water leaks and major repairs. Levies are used for this maintenance, as well as any unforeseen circumstances that may happen. Things like security upgrades, unplanned maintenance projects or unforeseen repairs fall into this category and can be costly projects. Property maintenance is vital in a community scheme, as this impacts the value of the property overall, and can prevent major expenses down the road when large repairs need to be done.

Levies are used to pay service providers such as managing agents and utilities (electricity, water, fuel etc). They’re also used for paying taxes, insurance and any other services required to upkeep the property. Levies are therefore essential to keep the scheme afloat financially, and any defaults can leave the body corporate in hot water. 

What happens when levies aren’t paid?

Levy defaults can cause a major imbalance in the cash flow of the scheme and ultimately a shortage in funds. Not only that, but the scheme will need to figure out how to pay for the legal costs of collecting the levies that are in appears and this can be expensive, which puts even more pressure on the scheme’s cash flow. 

In the event of levy defaults, there are usually three scenarios that can happen. Either the owners who are up to date with their levies will need to pay extra, or the community scheme will need to use its reserve funds, or any planned projects or expenses will need to be put on hold for a while until the cash flow is balanced again. 

While the Sectional Titles Schemes Management Act (STSMA) has now made it compulsory for schemes to have a reserve fund to cover property maintenance and repairs, this doesn’t always cover large expenses that are necessary at short notice, because a reserve fund will take years to build up. This, coupled with defaulting levies can leave a scheme with very few options.

This leaves all property owners in the scheme potentially at risk from the defaults on levy payments as municipal charges (electricity and water), critical running costs (security, lift maintenance etc) and general upkeep (lights, painting etc) will not be able to continue. 

Why not use special levies?

Special levies simply aren’t always a viable option. Schemes may be tempted to make up the shortfall by raising a special levy. A special levy should only be raised when additional income is required to meet a necessary expense that cannot reasonably be delayed until the next financial year.  

So, sometimes, body corporate loans need to be taken out to cover the shortfall of any legal fees and to take care of the payments that need to be made to service providers and the maintenance that needs to continue in the meantime. 

The solution

This is where our Debtor Finance solution comes in. It’s a revolving loan that provides up to 80% of homeowners’ levy arrears, providing a reliable and steady cash flow for community schemes. 

How does it work? Propell makes an initial advance to the community scheme, equal to 80% of levy arrears at the inception of the agreement. This should take care of most of the bills that need to be paid and any other urgent payments. Every month, the community scheme will need to liaise with Propell on the status of the arrears to determine if more funds are needed, or if the scheme can begin repayment. 

If the total arrear balance increased, Propell would advance an amount equal to 80% of the increase. Should the arrear balance have decreased, the community scheme would pay an amount equal to 80% of the decrease back to Propell. 

This revolving line of credit allows community schemes to use a body corporate loan, instead of expecting other property owners to pick up the slack and pay extra or having to dip into their reserve funds which should be kept for a rainy day. The Debtor Finance solution allows community schemes to continue with maintenance and paying bills, without falling behind.

If your community scheme is in need of a financial solution like Debtor Finance, you can find out more here.

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Phone number: 0861 33 34 35
Email: enquiries@propell.co.za

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