A reserve fund or ‘sink’ fund is created under the terms of an apartment lease, with the intention of building up a sum of money over time which can be used to pay for, or contribute to, large items of future expenditure. The concept is to split the cost over a period of time, preventing one off large payments. It’s essentially a rainy day fund.
A percentage of your monthly management fee is allocated to this fund to pay for repairs and maintenance to the internal or external areas of the building, perimeter fences and the replacement of communal carpets as examples. The fund is managed by an appointed management agent, who ‘should’ allocate an agreed percentage of the total monthly management payment, to this fund. The percentage however is a grey area.
You’ll often find that some residents have reservations and are hesitant to pay into a reserve fund. Reasons include; 1. Transparency of the current reserve fund balance. 2. Conflicts over what, when and where the money is spent. 3. If you sell your apartment, funds you paid are not recoverable.
Do You Know How Much is Allocated to the Reserve Fund?
Is it 5, 10, 20%? At the start of each financial year, your management agent should give you a budget for the whole year, clearly displaying the amount allocated to the reserve fund. From this you can work out the percentage and it should be at least 10% of all revenue generated via monthly payments from residents. Your management agent determines this based on all other costs — and from my experience, residents never have a say in this amount. However, if your management agent doesn’t provide a clear breakdown of the forecast budget of; monthly revenue minus monthly costs (buildings insurance, services, products and labour), giving you the reserve fund amount (percentage), then it’s open to abuse. It’s important to get full clarity on this.
Is the Reserve Fund Protected?
It’s critical to establish if your reserve fund (sink fund) is protected against loss in any form, including the management agent liquidating — it can and does happen. If for example the reserve fund has been allocated 20% of your monthly fee, and you’ve paid into the reserve fund for 3 years at £65 per month, and the management agent unexpectedly liquidates, that’s a personal loss to you of £468. Now multiple this by the number of apartments paying into the fund and it could be a very large total loss.
Do You Know the Reverse Fund Balance.. Today?
The burning question which is not as easy to answer as it should be. Knowing this key information in dependent on the integrity and transparency of your management agent, either they are, or aren’t transparent about the reserve fund balance. In a perfect world, all residents’ would be able to access the reserve fund balance at any given moment in real time, via an online bank account or secure admin area for your specific development, but this isn’t the reality. Not only do most management agents use antiquated accounting methods, they also like to keep the numbers vague and away from prying eyes. However, not only is it in the residents’ best interest to keep on top of the reserve fund, it’s your absolute right to know this amount — it’s your money.
Where Will the Reserve Fund Money Be Invested?
A question often dismissed by management agents. Because a percentage of this is your hard-earned money’ you should have a say where the funds are allocated and invested. Most management agents hold AGM’s (Annual General Meetings) and discuss such pressing questions, but be warned, if you don’t attend these meetings, forget having a say or a vote where you believe the money should go. It may also true that if you do attend meetings, your voice may be paid lip service and your vote could be ignored anyway. Catch 22!
You’ll Typically Find the Reserve Fund is Used For:
- General repairs and maintenance
- Site improvements such as new, communal heaters, technology upgrades, combination locks
- Painting to the communal areas and building exterior
- CCTV signs if cars and properties have been targeted
- Communal carpet replacement
- Perimeter fence maintenance
Who Controls the Reserve Fund?
Management agents will often select 1 or 2 individuals as a point of contact from your apartment block to use as a go-between. They will typically work closely with the management agent and have the authority to make decisions on reserve fund spend. It’s at their discretion if they speak with other residents for their input, but if they don’t, watch tensions rise between residents. You may just find that specific contact’s ‘Wish List’ slowly being ticked off one-by-one and requests of other residents being ignored.
Having 1 or 2 select people determine the outcome for the majority doesn’t work — it creates a gulf between residents. Good ole fashioned communication is the simple solution, but an implementation of technology is far more robust for the long term and would immediately give all residents a fair and anonymous vote. From a list of items, their priority would be selected, and the item with the majority of votes would be ticked off the list first and so on, until all items have been completed. This is the only way to make the process clear, fair and transparent. Here is a simple and free ‘Wish List’ voting tool example.