What are body corporates, owners corporations and strata schemes?
Body corporates, sometimes referred to as owners corporations, will likely play a major part in many investors' lives, by virtue of Australians’ increasing tendency to live in apartment dwellings. Here’s what you need to know about them and how they’ll affect your investment.
What is a body corporate/owners corporation?
A body corporate, referred to in some jurisdictions as an owners corporation, is the body of owners in an apartment or unit complex that is governed by a strata scheme. When you buy a property in a building with a body corporate, you not only assume ownership of that apartment/unit, but also shared ownership of common areas in the building.
A body corporate is a group governed by strata legislation formed at a state/territory level, and exists primarily to manage and maintain the common areas of the building – although their powers can extend far beyond this, including to by-laws governing the ownership of pets, for example.
Owners of apartments in a strata complex with a body corporate, be they owner occupiers or investors, pay a fee to be members of their scheme. These fees are outlined in the next section, and can have a significant impact on the financial viability of an investment property.
Owners corporations hold Annual General Meetings to discuss the income and expenditure of the owners corporation over the period of the previous year, and elect the executive committee. Extraordinary meetings can be held to discuss urgent repairs, or if an owner wishes to voice concerns – such as concerns over the rate of body corporate fees.
All body corporates have an executive committee, which owners or owner’s designated representatives, can be voted on to. This executive committee takes control of the day-to-day running of the strata scheme.
What are body corporate/ strata fees?
Body corporate fees typically fall into three categories.
The first is administrative fees, used to cover day-to-day expenses such as insurance premiums, building cleaning and provision of services (electricity, water) to common areas, and garden maintenance.
The second form of fee/levy imposed by some body corporates comes in the form of a sinking fund. Body corporates use sinking funds as the means of saving for maintenance and upgrade projects in the building. This could include projects such as recarpeting common areas or repainting. These sinking funds are made up of contributions levied on lot owners in the scheme. Legislation in some states requires body corporates to develop a detailed long-term plan of how these sinking funds will be used and how they will be levied.
Lastly, a special contribution levy may be imposed for unforeseen major projects and repairs. This levy is typically a one-off, or short-term levy.
So, how much are body corporate fees?
Exactly how much these contributions will be vary from complex to complex, and are dependent upon size of common areas, locality, the building’s age and condition, and the number of apartments in the block.
Body corporate fees can be below $1,000 per annum, although the average is more in the $5,000 to $6,000. However, body corporate fees can run up to as high as $25,000 per annum in some complexes – a significant additional cost that will need to be factored into an investment purchase as body corporate fees must be worn by the owner, not the tenant.
It is important to remember that, like many fees associated with a designated investment property, body corporate fees are tax deductible on investments.
What to look out for
The cost of body corporate fees is certainly a consideration to keep in mind when investing in an apartment/unit that is part of a strata complex. However, for most investors, it’s not a reason to rule out investing in such a building altogether. With careful research you can establish the body corporate costs you are likely to be up for when purchasing, as well as finding out any future issues likely to be faced by the complex.
When considering the purchase of an apartment/unit in an existing complex, request copies of the strata bylaws (the rules dictating the use of common areas in the building and general use of the building), minutes from the AGM of the body corporate, as well as copies of the long-term sinking fund plans for the building.
Firstly, this will allow you to gain an insight into the mindset of the building’s owners, and establish any limitations this could have on your new property’s tenant appeal (such as pet ownership rules, or short-term stay restrictions). An inactive body corporate might mean that fees are lower, but it may also mean that the building is set to face significant unforeseen issues into the future.
It will also help to establish what state the building is in by analysing future scheduled repairs and documentation of past issues. For example, have there been issues with flooding in the building? Are there plans to repaint the building in the future?
How will the body corporate impact my tenants?
Before you go ahead and give your tenants the nod to keep a pet, or put a clothes line on the balcony, you’d do well to check with your body corporate’s building bylaws. Many buildings simply adopt the model bylaws in that state or territory which govern the use of the building and the appearance, but some body corporates choose to modify these model bylaws. You might be fine with a tenant’s request, but your decision may clash with the building’s bylaws.
If you or your tenant breaches the building’s by-laws, a compliance notice may be issued. If the matter is not resolved, it may be referred to that state/territory’s administrative tribunal and a financial penalty may be imposed. The exact process of this, and associated financial penalties, varies by jurisdiction.
Get involved in your body corporate
If you do buy an investment property in a building with a body corporate, or you have already done so, make sure you exercise your right to be involved in the running of the building.
Be sure to attend, or have a representative attend, your body corporate’s AGM, and consider becoming a member of the executive committee – this way you can have a direct say in the future of your investment, and take an active role in maintaining or enhancing the value of your investment.
If you’re concerned about the rate of body corporate fees, joining the committee is a way to decide on what rate the fees will be set at, by way of vote.
It’s important to keep up with your state or territory’s strata regulations, as these are subject to change, as we have seen in New South Wales in recent years.
When investing in a strata scheme, you should also be aware of what will happen if the building needs to be refurbished, renewed or demolished.