Long-Term Maintenance Fund – does our body corporate need one?
For any body corporate in New Zealand, safeguarding the long-term health of your building is hugely important. It not only means that you are more likely to provide a comfortable living environment for residents, but can also have a significant impact on protecting property values.
One of the ways to achieve this goal is to create a Long-Term Maintenance Fund (LTMF). Here we look at the concept of LTMFs, the benefits and disadvantages of having one, and how you can simplify their management.
What is a Long-Term Maintenance Fund?
An LTMF is a dedicated financial reserve established by a body corporate to cover the anticipated future maintenance costs of the building's common parts. These common parts typically include the roof, exterior cladding, plumbing systems, electrical wiring, fire safety equipment, landscaping, and shared amenities like pools or elevators.
Why is an LTMF important?
There are several compelling reasons for your body corporate to establish an LTMF:
- Planned and proactive maintenance: An LTMF allows you to budget and plan for inevitable maintenance needs, avoiding costly repairs down the line.
- Financial stability: By consistently contributing to the LTMF, you prevent large, unexpected financial burdens on unit owners when major maintenance projects arise.
- Improved property value: A well-maintained building with a demonstrably healthy LTMF is more attractive to buyers, potentially increasing property values.
- Peace of mind: Knowing you have a financial safety net for future maintenance needs fosters a sense of security and reduces stress for both body corporate members and property managers.
Does my body corporate need an LTMF?
The Unit Titles Act 1995 doesn't mandate LTMFs for bodies corporate, but with the more recent Unit Titles Amendment Act 2022 placing a strong emphasis on Long Term maintenance planning, there’s a strong argument to say that an LTMF directly supports a comprehensive LTMP by providing the financial resources to execute the planned maintenance activities.
Therefore, whilst not strictly mandatory, having an LTMF is highly advisable for responsible body corporate management, within the Act – but it should be noted it may not always the right choice for you.
How much should be in the LTMF?
The ideal amount in your LTMF depends on several factors, such as the size and age of your building, the types of common areas, and the estimated costs of future maintenance projects. A qualified professional can help you conduct a detailed reserve study to determine the appropriate funding levels.
How is an LTMF managed?
Bodies corporate typically set contribution rates for unit owners, with payments collected regularly like any other body corporate fee. The funds are then held in a separate bank account dedicated to the LTMF. Clear record-keeping and responsible financial management are crucial.
What are the disadvantages of having an LTMF?
While your LTMP is a fantastic roadmap for future maintenance, it’s designation as such means there are strict rules surrounding its use: mainly that it can only be used for activities that have been planned and costed in advance. Unforeseen circumstances can arise which cannot be funded from an LTMF, and even if maintenance work was planned, if it were to end up costing more than 10% above the budgeted amount in your LTMP, you'll need to get approval from the body corporate before proceeding with the work. This typically involves calling an Extraordinary General Meeting (EGM) and can cause delays in reparation.
This can mean that the body corporate overestimates the cost of maintenance so as not to be caught short, resulting in them collecting (and holding on to) increased levies from unit owners.
What are the alternatives?
Given that the funds in the LTMF are only to be spent on items listed in the long-term maintenance plan, some bodies corporate choose not to have one and prefer to set up one, or more, of the following.
- Operating account: All bodies corporate must have one of these, to cover ordinary bills as well as insurance costs.
- Contingency fund: This might be the most common alternative to the LTMF. It is not compulsory and is typically used for projects such as weathertightness repair projects.
- A capital improvement fund: Another non-compulsory fund, this is generally used to cover upgrades to the unit title development, that have not been included in the long-term maintenance plan.
To summarise, while there are benefits to having a LTMF, it does come with conditions on how it can be used, whereas having a more generic “reserve” fund does not, so make sure you are comfortable with those conditions before deciding.
Invest in your building's future
Establishing and maintaining a healthy LTMF, or suitable alternative, is an investment in the long-term well-being of your body corporate property. With proper planning and the right tools like Commonview, you can ensure a well-maintained building, financial stability, and peace of mind for all unit owners.
