The Covid-19 pandemic and two years of lockdowns played havoc with the finances of many community housing schemes, and many are still struggling to catch up payments in arrears to various creditors, while simultaneously trying to tackle overdue maintenance issues and keep up with current demands on their budgets.
What’s the way out?
However, says Andrew Schaefer, MD of SA’s leading property management company Trafalgar, there is a way for Trustees and Directors to get out of this financial bind, “and that is to secure a loan that enables their scheme to immediately settle any municipal arrears or large amounts owing to other to creditors, and then repay the lender over a suitable term and in instalments which fit the pockets of the owners.
“A major advantage of doing this is that schemes are able to avoid the possibility of costly and time-consuming service interruptions or legal disputes with creditors.”
Trafalgar Financial Services*, which is a registered credit provider (NCRCP2678), also offers upfront finance to enable community housing schemes to undertake maintenance and capital projects that are needed but not currently affordable, he notes.
“This type of loan helps schemes to lock in the price of a particular project and avoid the risk of material and labour escalations over time. At the same time, they are able to retain the funds they have saved for emergencies and future maintenance.”
Such loans also enable the immediate enhancement or restoration of value, and greater opportunity and liquidity to resell units, since bonds will more easily be granted to home buyers in a scheme that is in good condition, he says.
“However, we believe it is vital for larger and complex maintenance projects to be managed by a qualified professional who can accurately determine the scope of work, assist with tenders, and ensure that the work is completed on time while the scheme also receives the correct guarantees and quality of work. We thus recommend that any scheme requesting a loan for a larger scale project should also appoint a professional project manager, whose fees can be incorporated in the finance agreement.”
Meanwhile, says Schaefer, there is rising demand now for loans to cover the installation of renewable energy alternatives which are becoming critical to maintain operations in schemes due to the unreliable Eskom supply. “And due to the ongoing price increases imposed by Eskom, these alternatives are rapidly also becoming more financially feasible, with shorter relative payback periods.”
The legal power to borrow
Section 4 of the Sectional Title Schemes Management Act (STSMA) gives the body corporate of a sectional title scheme (and thus its appointed trustees) the power to borrow any money required to properly perform its functions, and to guarantee the repayment of this loan plus any interest owing – provided it has obtained the consent of the owners in the scheme via special resolution at an AGM or at a Special General Meeting (SGM).
Owners voting on a resolution should be aware that loans made to community housing schemes are usually labelled as “mezzanine finance”, which is likely to be linked to the prime interest rate. Consequently, changes in that rate will affect the interest charged by the loan providers – and the repayments that they will be making by way of a special levy.
The minutes of the AGM or SGM recording the approval of the resolution would also need to include the details of the loan amount, the agreed repayment period and the special levy schedule showing each owners obligations with regards to the repayment. Only then would the Trustees be able to legally sign the loan agreement with the lender.
Schaefer notes that in community housing schemes run by Homeowners Associations (HOAs), the situation would differ in that the Memorandum of Incorporation or Constitution would state whether the Directors could enter into a finance agreement directly, or would need a special resolution to be passed by the members first.
“However, once a loan agreement has been signed by any scheme, an obligation arises for the scheme to pay back the borrowed principal funds, interest and any associated fees, and we often get questions on how this should be handled from an accounting perspective. The accounting entry to denote the amount borrowed (principal amount) is with a debit to cash/bank and a credit to a loan liability account which is reported on the scheme’s balance sheet.
“The principal amount is not part of a scheme’s revenues and therefore will not be reported on the scheme's income statement. Similarly, any repayment of the principal amount will not be an expense and will also not be reported on the income statement, although both the receipt of the principal amount and the repayment of this amount will be reported on the statement of cash flows. The interest on the loan will be reported as an expense on the income statement in the periods when the interest is incurred, and a corresponding credit will be added to the loan liability account.”
Writer: Meg Wilson
