Levies are the bread and butter of a sectional title scheme. Levies cover necessary bills that need to be paid for the upkeep and maintenance of the property, rates, utilities and so on. As with most businesses, cash flow is the lifeblood of the sectional title scheme, and with levies being the income, it can be detrimental to a scheme when homeowners default on their levies or pay an incorrect amount. So, let’s take a closer look at how levies are calculated, as well as a financial solution for community schemes dealing with levies in arrears.
How are levies calculated?
1. Running costs are calculated
Every year, the trustees of the body corporate will budget the running costs of the scheme for the upcoming financial year. The levy payments from homeowners will need to cover these expenses and keep the cash flow balanced. Once the budgets are approved at the Annual General Meeting (AGM), the trustees will work out how much the levies will need to be, to cover the running costs.
2. Participation Quota is calculated
Each property’s levy contributions are then determined by a Participation Quota. This goes according to the size of the property, which is the amount of the sectional title scheme that the home takes up. The Participation Quota calculation is:
Total square meters of a sectional title scheme ÷ Total square meters of each unitFor example: 100m2 divided by 1000m2 = 0.10
This means that the homeowners’ property accounts for 10% of the full sectional title scheme.
3. Levies are calculated
From these two numbers, individual levies can be determined. This is done by taking the total budgeted amount and multiplying it by the participation quota which is a percentage. This amount is then divided by the number of months in the year. The amount that is left, is the monthly levy amount due for the property.
Here’s an example:
If the budget was R200 000 and the PQ was 0.10, the homeowner is expected to contribute 10% of R200 000. This is a total of R20 000, divided by 12, equals R16,667. This is the final levy amount that will be due each month for the property.
4. The levy statement
Each month the body corporate will invoice the members of the scheme with a levy statement which indicates what their contribution towards the scheme will need to be. The statement usually includes the levy amount payable, the CSOS (Community Schemes Ombud Service) levy amount, the EUA (Exclusive Use Area) levy (if applicable), any rental that may be applicable for homeowners who are renting property from the body corporate, each homeowner’s portion of the maintenance reserve fund, and any utility bills such as electricity.
What happens when levies aren’t paid?
Often, people default on their levies over the holiday season and this can pose a major problem for sectional title schemes during this time. The first step is to notify the relevant homeowners as quickly as possible but based on the fact that many people are away during this period, an early notification is a good idea. Schemes can arrange a debit order early if need be, however, levies can often go into arrears over the holiday season.
At Propell, we’ve developed a financial solution for sectional title schemes that find themselves in hot water from levy defaulting. Our Debtor Finance option is a great solution for schemes to prevent other homeowners from having to pick up the slack and cover the expenses or the community scheme having to dip into their savings.
Debtor Finance provides community schemes with a reliable cash flow by providing a revolving loan of up to 80% of the levy arrears. Bills can continue to be paid, and property maintenance can continue to be done, and the scheme can meet their budget requirements without any major hiccups. Once the scheme has recovered the levies that were in arrears, they can then pay back the Debtor Finance loan. This can come in particularly handy during notorious levy defaulting times like December and January.