Reserve funds, future maintenance, preventive maintenance are all titles for the same thing, which is saving for a rainy day. Many leases provide for the landlord to collect sums in advance to create one or more reserve or ‘sinking’ funds. The purpose of such funds is to build up a sum of money to cover the cost of irregular and expensive works such as external decorations, structural repairs or lift replacement.
We are finding more and more buildings who talk to us about their current management are concerned that they have no reserve funds plan or not enough money for their future needs. We also find a lot of new buildings do not understand the importance of starting to collect their reserve funds from day one thinking the building is new and why should they bother.
The sooner you start the lower your monthly service charge will be in the long run. Imagine a new lift costs £50,000 (or more) to replace and lasts up to 30 years. If you don’t collect for this for the first 10 years of the building’s life you now only have 20 years to collect the same sum. This means your service charge has to escalate rapidly.
“Did you know a new lift can cost £50000 upwards to replace?”
Interestingly, there is no set formula or process for saving these funds. There is also no set guidance for the expenditure of these sums. The lease will often give (at best) weak guidance on this area. As buildings start to get older this fund becomes more important. It’s a little like your pension. The earlier you start the less your payments are and the more you will retire on.
Reserve funds (or sinking funds) the Revolution way
This is so important to us that we’ve had our own sinking fund plan software created. We plan your building’s requirements over 20 years to see if you have the funds needed. Our aim is to not have to produce levies where possible. A levy is where we have to invoice leaseholders for all or some of the funds required in one go.
There will be times when a surveyor needs to have input into the plan for very specialist items of costing. We also use a RICS (Royal Institute of Chartered Surveyors) piece of software called BCIS (Building Cost Information Service) to help with our costing models. Because we are working with 20 years of maintenance we can advise where there may be financial bumps in the road ahead and plan for them.
Finally, a well managed building will look better and retain its value for the future without any nasty surprises. Reserve or sinking funds make sense!