Reserve Funds for later

Sinking Funds. Reserve Account. Panned Preventative Maintenance, or Planned Maintenance Programme. Could Sinking Funds be better spent elsewhere?

Are we all Sinking the same?

A Sinking Fund, or Reserve Fund, is a common phrase used to describe what is in effect a pot of savings for your block or estate. The current account or Service Charge is typically used for monthly and annual expenses, but it is often prudent to save a pot of money for future, expensive repairs that are necessary in the ordinary life cycle of the building, and would be considered good maintenance.

What is it used for?

Just like your own property, where you might have large and unusual expenses like replacing a boiler or a kitchen, communal properties have similar problems but often on a larger scale. While these costs are infrequent (possibly every 5 years or even 50 years), they usually come with significant price tags - after all, resurfacing a road, or replacing a roof or a lift are not small or cheap jobs. Sinking Funds could contribute to a range of projects, for example including:

• Internal decoration - painting and decorating communal corridors, stairwells and halls.

• Replacing carpets - replacing communal carpets in stairwells and corridors.

• External decoration - painting external areas including timber windows, soffits, fascias.

• External repairs e.g. repointing, render repairs, timber repairs - brickwork, render and timber all degrade over time and are likely to need repairs from time to time.

• Replacement or modernisation of lifts - lifts have an average life span of 20-25 years, after which they need significant work to overhaul the equipment and keep them running.

• Pump replacement - water pumps, either for supply or waste, have a limited life and require periodic replacement.

• Resurfacing roadways and carparks - road surfaces degrade over time and at a certain point it is more economical to resurface large sections instead of filling small potholes.

• Roof replacement - regardless of the material, roofs do not last forever and need regular repair and maintenance and, eventually, full replacement.

• Replacing fire safety systems - fire safety equipment, such as emergency lights, fire alarms ad alarm panels, also have a limited life and require periodic replacement.

How much is needed?

It is impossible to estimate costs for each property without detailed information of the equipment, age, condition, and various other ongoing factors. That said, consider something like a lift which could cost £50,000 every 25 years - this means the building needs to save £2,000 per lift, per year, every year, Any dipping into the Reserve Fund for other works will remove these savings when the lift is then due to be replaced.

External decorations have a very broad price range, but assuming maybe £2,000 per flat every 5 years would be £400 per flat, per year.

For example, a building with 20 flats, including 2 lifts, would need to consider:

Lifts - potentially £100,000 every 25 years = £4,000pa

Carpets - perhaps £6,000 every 15 years = £400pa

External decoration - could be £40,000 every 6 years = £6,666pa

Internal decoration - allowing £10,000 every 10 years = £1,000pa

This adds up to £12,066 every year for 25 years. Divide this among 20 flats, is over £600pa paid towards the Reserve Fund every year.

Unfortunately this example does not consider inflation over 25 years. Nor does it allow for changes to taxes, material or labours - all a serious shock to industry following the Covid pandemic. What about the roof, how much would you save?

Saving funds like this can never be a precise art, but it is important to be realistic and not underestimate costs - otherwise owners will end up with a large invoice at short notice.

Why has this only just come up?

The majority of building managers are aware of the need for a Sinking Fund and the importance of saving towards this. There are however always challenges:

• Some leases do not permit the saving of a Reserve Fund. While not practical, it does mean it should not be collected and as such, leaseholders must save their own funds in case large bills are raised in future.

• Communication - it may be that a Sinking Fund is in place and has been planned, but this might not be communicated to all the owners. Even so, it could have been saved and then spent more recently, and inflation may have consumed more of the fund than anticipated.

• Client resistance - the reality is that when managers advise their clients to increase a Reserve Fund contribution, it is often viewed by clients as an unnecessary extra in and amongst a budget that often has other increases. In an effort to keep annual costs low, most clients will not save more than necessary and regularly under-budget for the long term Sinking Fund.

• Affordability - there is a requirement for Service Charge costs to be reasonable. This includes consideration to affordability, and unfortunately some buildings are simply not readily affordable for some individuals.

Planned Maintenance Programme

A PMP is generally prepared by a surveyor, to indicate likely costs and necessary works. They will record the services and equipment in place, assess the life span and likely costs to maintain, and project these costs in a programme of works over the course of 10+ years. These plans are invaluable for larger buildings, where the one off costs of a project would be completely unaffordable for the owners and they have to save ahead for such works.

What can I do?

It is important to understand the setup of your estate or building; is a Reserve Fund permitted or should you save independently, how much is in a Sinking Fund (if anything) and what costs are anticipated in connection with a Sinking Fund? You may be able to get a good idea by checking the annual accounts in the first instance, and comparing this with your budget to see what services are provided. If you have any concerns, it is worth speaking with your property manager to get a better understanding and plan ahead properly.