Miami Manager’s Half Million Dollar Fraud

The Miami Herald has reported a sorry story of fraud by Lourdes Rodriguez, 48, the former general manager of the Atlantic II.

She’s been charged with grand theft and organized fraud by Aventura police who have accused him of taking nearly $500,000 from the condo association. 

In February 2010 auditors alerted the association that Rodriguez had been receiving a salary higher than approved which led to a specialist accounting firm analyzing the condominium association’s account. They discovered about $506,956 taken from the association between January 2007 to February 2010.

Rodriguez blamed her actions on a gambling addiction in an e-mail to residents and vowed to repay the association 'no matter how long it may take.'

The association has recouped about $400,000 from its insurance company.

It’s a real concern for all strata corporations since it’s so easy for dishonest people to access money and only careful financial controls (including regular detailed audits and checking) can discover and deal with it.

Francesco …

Show me the (Strata) Money !!!

I recently read Jimmy Thomson’s editorial piece in the ISTM Newsletter called “And for my next Trick” about why strata owners won’t pay money for things and it got me thinking about why that’s so true.

Everyone knows that when it comes to getting strata corporations to spend money you need to use every strategy imaginable and, even then, it may never happen.  This so even when it’s patently obvious the money needs to be spent, the strata corporation is liable or will become liable to damages and penalties if it doesn’t, apartments and common areas are less attractive, secure, waterproof, etc and the value of apartments are affected and declining.  And, logically it will cost the strata corporation more in the future anyway.

I think this is a result of a few things as follows (none of which are easily resolved).

1.   There’s generally never enough money available to strata corporations (either in the current budgets or saved) which makes everyone reluctant to spend.  In other words most strata corporations are always too poor for their actual or ideal circumstances.

2.   Strata owners don’t have enough money either.  Whether the owners are new buyers who have borrowed heavily to buy so don’t have spare savings or cashflow, older owners with fixed incomes who can’t manage unexpected extras, retirees who want to preserve assets for later life, or investors who make better returns with lower expenses; they all have a personal incentive to spend less in strata.

3.  Strata corporations and strata owners are risk averse when making group decisions so are unlikely to borrow money to pay for things.

4.  There is aggregation thinking amongst strata owners.  By that I mean that rather than 100 strata owners seeing a $50,000 expenditure as only $500 for each of them, they see it as a $50,000 expenditure by each of them.

5.  Most strata owners have a short term horizon, so medium and long term benefits are less valuable to them.  If free standing homeowners move or sell every 7 years, then strata owners do so more often (every 4-5 years) and 4 years is not a long time to wait if you plan to sell.

6.  It’s too easy to delay decisions and action in strata corporations.  Things need to wait for meetings, meetings don’t happen that often, meeting quorums are not always achieved, suggestions to delay hard decisions are often agreed without dissent (usually on the pretext of finding out more details and options), individual strata owners' ability to force action is limited, and it often appears more sensible to investigate things further.

7.  Strata committees and managers have a mindset that saving money (in absolute terms) is doing a good job.  That’s not surprising in all the other circumstances but it demonstrates a misunderstanding of the difference between getting better value and saving money.

8. The real cost of not doing things (and spending money) is never measured and known.  So it always looks like delay, reducing activity and saving are financially better.  But, it’s probably true that in many cases the true cost of strata situations to owners and occupiers is hidden and much higher than the savings.

9.  There’s very little leadership in strata governance circles for strata owners to follow.  So, decisions tend to degenerate to consensus only matters or the lowest common denominator (which is rarely prompt action and expenditure).

10 . Very few strata corporations have a strategy, objectives or medium term plans so there is no co-ordination of activity, no defined objectives by which to assess actions (and expenditures) and no measures to apply to determine progress (or not).

11.  There’s very little regulation and enforcement of strata corporation obligations to act and spend.  And, when owners do enforce those obligations by legal action the strata corporation acts as though it’s being victimized and the protagonist strata owners are demonized.  So, inaction and saving are condoned.

There’s probably many more reasons and I’d like to hear from others about them.

But, even these 10 reasons are powerful influencers for strata corporations to keep things lean and spend as little as they can get away with.  And, I can’t see much happening to change any of them.

So, see you at the strata poor house again next year.

Francesco …

What do Fanny’s have to with US Strata ?

I was reading about US strata corporations losing Fannie Mae and Fannie Mac approval and wondered why it was a big deal.  So, I investigated it more and found out some fascinating things about the drivers of the medium and high density real estate sector in the US.

The story goes something like this.  And, sorry, it’s a long story.

In the USA the residential real estate mortgage market works a bit differently to Australia.  Apart from the mainstream banks who provide mortgage finance there are organisations like Fannie Mae and Fredie Mac that sit behind banks and underpin residential mortgages.

GSE's Explained

So, what’s a Fannie Mae or a Freddie Mac?

Fannie Mae and Freddie Mac are government-sponsored enterprises with a mission to provide liquidity, stability and affordability to the US housing and mortgage markets and to increase the amount of funds available in order to make homeownership and rental housing more available and affordable. Fannie Mae and Freddie Mac work with mortgage bankers, brokers and other primary mortgage market partners to help ensure they have funds to lend to home buyers at affordable rates.  These kinds of loans have low rates and very low down payment requirements (usually 3%) and the government guarantees those loans so the lender is protected in the event of default.

Fannie Mae, Freddie Mac and other GSEs (government sponsored enterprises) buy loans from lenders – allowing the lender to offer a low interest rate since it sells the loan (and the risk) to one of these entities.

The Federal Housing Financing Agency (FHFA) is a government agency created to regulate and oversee GSEs like Fannie Mae and Fannie Mac and to make sure the GSEs operate in a "safe and sound manner".  So it reviews business practices of the GSEs and effectively sets the parameters for mortgage lending.

So when someone wants a Fannie Mae or Freddie Mac backed mortgage in a condominium or community association the condominium or community association operations must satisfy the FHFA requirements … otherwise there’s no loan at these lower rates and favourable terms.

Approval Guidelines

These requirements are detailed and complex and include things like –

• there are two or more units
• the project is 100 percent complete
• construction has been finished for at least one year
• 100 percent of the units have been sold
• no one owns more than 10 percent of the units
• the budget funding replacement reserves for capital expenditures and deferred maintenance (at 10%)
• home owners are in control of the association
• at least 50 percent of owners occupy the property
• there’s adequate hazard and liability insurance (including flood and fidelity insurance where necessary)
• less than 25 percent of the total floor area in a project is for commercial purposes
• the commercial portion of the project must homogenise with residential use
• less than 15 percent of unit owners fee payments are in arrears 
• only 30% to 50%, of the units can be funded under FHFA approved lenders (with exceptions available)
• there must be a satisfactory independent budget review establishing that the budget:

   - is adequate,

   - includes allocations to ensure sufficient funds to maintain and preserve all amenities and features of the project

   - provides for funding of replacement reserves for capital expenditures and deferred maintenance at least 10% of the budget

   - provides adequate funding for insurance coverage and deductibles

In some cases a reserve study may also be required.

And, FHFA approvals expire after a period of time so also need renewal.

Unsurprisingly, many of the current operational and management practices in US condominium and community association exist to satisfy FHFA approval, rather than because of legislative requirements or simple market forces between managers and owners.

Current Issues & Developments

In the past strata corporations viewed FHFA financing negatively.  But declining real estate values and the banking crisis has eliminated many options from conventional lenders who will not finance properties if the loan is not acceptable to the secondary market (Fannie Mae, Freddie Mac and the like).

So today, Fannie Mae or Freddie Mac approval may bring more buyers for units  

because financing will be more readily available. Additionally, the increased marketability of those units currently for sale in a Fannie Mae or Freddie Mac approved project not only helps the current sellers, but also serves to increase the value of all units in the condominium. This will not only help owners currently looking to sell or refinance, but will also help those unit owners who may wish to sell or refinance their units in the future.

The November 2009 guidelines temporarily increased the number of permitted FHA insured loans in a particular project from 30% to 50%.  100% of the loans can be FHA insured if the project meets all of the basic condominium standards and the additional items. 

Fannie Mae recently auctioned close to 100 South Florida properties.  Those properties were only offered to owner-occupants (individuals and families who plan to live in the homes), not investors, in an effort to stabilize neighborhoods severely impacted by foreclosures.

There are some obvious benefits to GSE financing and some obvious detriments.  One benefit is flexibility - government backing allows Fannie Mae to offer hardship relief to home/unit owners.  For example, Fannie has the ability to offer loan forbearance to mortgagors plagued with chinese drywall (allowing them to skip 6 months principal payments so owners can catch up other financial obligations.

See you at the next Fannie Mae mortgagee sale.

Francesco …

Strata Corporations Take over Lots of Lots

We don’t have it so bad here in StrataLand in Australia on some things when you look at other places in the world.

Take strata fees for instance.

In the USA the mortgage and property crisis has caused serious problems with strata fees for many strata corporations and associations as owners cant pay mortgages and fees.  On top of that many US banks are not foreclosing and so leaving the problem alone without pressure on owners or sales to effect payment. 

So, strata corporations are having to be more proactive and inventive to get the cash-flow they need to operate.

Like in Florida, where Donna Gehrke-White reports that some strata corporations that are strapped for money to pay for property maintenance, many associations are foreclosing on owners who don’t pay fees, then renting the units to bring in cash.

The article in the Miami Herald, includes the following fascinating comments –

• Don Urquhart, a board member at Quadomain Condominium in Hollywood says, no one wants to throw a neighbour out of his home. But that is what Urquhart says he and other community association leaders have been forced to do and “It’s not fair for your neighbour to pick up your share,’’ says Urquhart.
• For years, many community associations rarely foreclosed. But that changed when the real estate crisis swept throughout South Florida more than three years ago and the rate of unpaid maintenance fees grew dramatically.
• Now he and other association leaders routinely start foreclosure proceedings if owners don’t arrange to pay delinquent dues. Urquhart and other association leaders, however, say they will work with owners who try to catch up.
• Association leaders, though, have to remain tough against those who won’t try to pay, he adds. The reason is simple: Someone has to pay to keep the lights on, the grass mowed.
• Now some associations are even trying to beat banks to the courthouse to foreclose first on properties owned by deadbeat owners. The upside: They can get months – if not a year or two – of rent before the banks formally foreclose.
• But he says even if associations don’t rent out the properties, foreclosing helps recoup money, because a threat to take property will get lenders moving to start their own proceedings. Once the banks have foreclosed and take over title, they are legally required to pay association fees.
• A state law that took effect July 1 also requires foreclosing lenders to pay a year’s worth of unpaid maintenance bills or 1 percent of the original mortgage debt – whichever is less.
• Some non-paying homeowners have ended up staying in homes for years – neither paying mortgages, nor association fees, adds attorney Eric Glazer. In some cases, homeowners demanded to see the paperwork, which banks did not have. That further tied up the foreclosure proceedings, Glazer says. Last fall, several banks suspended proceedings because of confusion over paperwork. Now they are back at it again. But foreclosure can still be a slow process.
• “Some condo associations flat out do not have the money to even pay for water,” says Kip Farris, who manages community associations in both Miami-Dade and Broward.
• Leaders in community associations say there’s an added benefit to foreclosing: Many properties are better maintained by renters. Homeowners who can’t afford their mortgages or maintenance fees often don’t keep up their property. They can become angry over their situation and even tear up their homes. Yards become overgrown, condo units run down. That hurts others’ property values.

Although we haven’t reached these situations yet in Australia some of the things that these Florida associations are experiencing are quite similar to the Australian experience.

See you in the strata foreclosure courts.

Francesco …

Bank the Strata Money

Money makes the (strata) world go around!

But, things are different for strata corporations (compared with people and other organisations) since strata corporations do not have the flexibility and choice individuals do about what to earn and spend and strata corporations do not have profit or social good objectives to work towards and guide finances like business and not-for-profit organisations.

Rather, strata corporation finances are a closed loop of setting budget for anticipated expenditure, collecting money from owners when needed and spending it appropriately.  At the end there should be (all things going well) nothing left over and no shortfall.  If there is that surplus or shortfall is taken into account in budgeting and collecting.

This is also the pattern for sinking or reserve funds but simply over a longer period so it’s less obvious than annual budgets (and often owners and managers do not hang around for long enough to recognise it).

When it goes wrong (usually because there’s a shortfall of funds) the following unpopular things become necessary.

• Planned activities like repairs, upgrades, legal actions, etc need to be deferred.  This delays things, can add to cost and, in the case of important repairs, can expose strata corporations, executives and managers to legal liabilities.
• Creditors don’t get paid on time.  This can also delay service or product delivery, incur late charges, spoil relations between strata corporations, managers and creditors, cause the strata corporation to have to change suppliers (or find cheaper suppliers).
• A special levy has to be raised to cover the shortfall.  This makes everyone unhappy (especially those on fixed incomes, like pensioners and investor owners).
• The next cycle’s levies (usually the next year) needs to be higher than they should to catch up the shortfall.  This reduces yields on investments, puts extra pressure on resident owners and makes the apartments less attractive to buyers compared to those in strata corporations with lower annual levies.
• The money needs to be borrowed to cover the shortfall and repaid over time (effectively) converting a one off special levy to make up the shortfall into a special levy to repay the loan.  This also makes future levies higher than they would be: reducing yields on investments, putting extra pressure on resident owners and making the apartments less attractive to buyers compared to those in strata corporations with lower annual levies.

So, a few things seem critically important to get this process right (or as right as possible).

Better Budgeting – Getting the estimated expenditure as right as possible is very important and this involves properly assessing what needs to be paid for (and when), estimating the likely cost, provisioning for some unknown but likely costs (like legal fees, emergency repairs, dispute costs, levy recover expenses, extra management time, etc) and having supporting data, material or reasoning to explaining the estimates.  

Owner Information – Explaining the strata corporation's financial position, the expected future expenditure, the underlying basis for those estimates, the need to raise the correct amounts and the consequences (short, medium and long term) of not doing so to owners when they have to decide about strata levies can make all the difference.  It’s inevitable that owners will want lower strata levies so this desire needs to be managed since no-one really wants to save a bit of money now if they have to pay more than the saved amount later.

Timely Strata Levy Collection – Collecting strata levies from owners in sync with the expenditure is the most critical aspect of effective financial management since the usual quarterly levy cycles mean that (on average) 25% of the strata corporation's annual funds should be paid at the beginning of each quarter and spent during those 91 days.  Strata levies that are unpaid into the second or third quarter can cause cash-flow pressure and if the number of owners in arrears is high enough, a cash-flow crisis.  If 10% of the owners don’t pay for 2 or three quarters the strata corporation is 7.5% behind cash-flow needs before the year is over.  

Getting Interest – Where there are levy arrears strata corporations should always insist on recovering interest because it’s a penalty on owners and will help ensure more timely payments in the future and it’s a bonus for the strata corporation.  That’s because in most cases the strata corporation does not suffer any penalty when it defers expenditure, uses reserves to pay for things or manages to avoid penalty interest from creditors.  So, in effect the strata corporation gets 110% of the levy when it will only have to pay 100% (and not more) of it’s bills.

Stopping Leakage – When a strata coporation has collected owners’ levies it needs to make sure the money is preserved so that there is no leakage (and ideally the money increase by the inflation rate).  Leakage can occur in many ways including bank charges, lower than market interest rates, poor management of investment funds, incurring late payment and other unnecessary charges, fines, making small (and apparently inconsequential) payments, etc. 

Covering Shortfalls – When things don’t go according the budget it’s important to deal with (and cover) the shortfalls.  Typically that occurs when something ends up costing more than expected, unpredictable things occur or there’s some legal or other action.  And, usually strata corporations cannot choose to defer or avoid the activity.  In such cases, unless the inevitable shortfall is covered the annual budget will run out before the year ends.  Using reserves is only a temporary fix as the reserves will need to be replaced anyway.  In those cases decisions need to be made about whether to have a special levy, borrow money or change plans and/or re-allocate expenditure … and made promptly.

Accurate Reporting – If the strata corporation's financial position is properly recorded and reported then everyone will know what has (and has not occurred), understand why and the impacts and be better placed to make better decisions in the future.  Unfortunately, most of the prescribed financial reporting is inadequate and often confuses owners since it is typically a mixture of cash and accrual accounting, does not explain cash-flows, does not involve a quasi-balance sheet and does not properly compare actuals to budgets or track things over multiple periods.  It’s no wonder owners, executives and managers aren’t making the best financial decisions in strata corporations when they get low quality reporting. 

Since it’s 2011 I’m sure we can do a lot better with strata scheme money than we’re doing and allow owners , executives and manager spend time worrying about more strategically important decisions in their strata corporations.

So, see you at the bank with the strata money.

Francesco ….

Here’s your Christmas Present … Cheaper Real Estate

I’ve got a Christmas present for everyone … Cheaper real estate !

Well at least that’s what the real estate media is telling us.

Over the last week I’ve found more than 10 articles reporting falling real estate prices in various suburbs, cities, regions, states and nationally.  Some of them include.

From the New York Times an article called Value Sinking Fastest on Homes Priced Low to Start.

From partick.net an article called Housing Crash Continues -- It's A Terrible Time To Buy An Expensive House.

And, from the Sydney Morning Herald Domain 2 articles called National housing prices set to fall in 2011 and Market Going Down but Softly.

Oh, BTW the present is courtesy of the global financial prices, the US sub-prime market, political instability in Australia, the Reserve Bank and the Big Four Australian Banks.

Enjoy playing with your new presents.

Francesco …

Investing in Strata

A recent article by Monique Sasson Wakelin in the SMH Domain called Investment: What’s best? A house or an apartment? Makes some interesting comments about the benefits of investing in apartments.


Monique focuses on capital growth, reveals that over the last five years some apartment prices in Sydney and Brisbane have grown faster than house prices.


The median price for Brisbane apartments grew by 42.5 per cent while houses grew by 38.2 per cent.


In Sydney, the median price house growth was 30.1 per cent, which was ahead of the median price apartment growth of just 10.5 per cent. But for when we look at inner Sydney apartments price growth was higher 33.6 per cent.


And, in Melbourne, prices growth for houses and apartments was almost dead even at 55.3 per cent and 54.4 per cent respectively.


She concludes that “With a budget of $800,000 or more for a city property, a house is usually the better option. At $700,000 - $800,000, depending on the location, either option will work. Under $700,000, an apartment is usually a better investment.”


I have to agree and add that from a rental income perspective I think strata investment is also better in most cases since –

• the yield is generally higher compared to similarly priced houses (since you buy less house amenity than apartment amenity for the money)
• the operating costs are lower since you own less building and open space
• the operating costs are shared with the other apartment owners lowering them further and supporting you when things are tight
• more ownership costs are likely to be tax deductible since they are included in administrative fund levies

So, see you at the next apartment auction.

Francesco …

What's going on with US foreclosures ?

Current economic conditions (the continuing fallout of the GFC, the credit crisis, lower property values and increasing interest rates) have combined to cause more mortgage defaults and foreclosures.  And, that's especially so in the USA.


But, at the same time there's been a crisis relating to US foreclosures that has led to most US banks to stop foreclosures until it's resolved.


So, what is the crisis, what's the impact and how did it happen ? 


It's been discovered that the relatively strict procedures that need to be followed and the complete paper trail necessary in foreclosures was being shortcut by banks and their lawyers ... putting the lawfulness of the foreclosure at risk and making it challengeable.  So, banks have decided to hold foreclosures whilst they investigate the processes, correct them and/or make further legal challenges.


But the halt on foreclosure has a massive financial impact (on everyone) when you consider that estimates are that up to US$154 bilion in mortgages could be affected by the delays (source - Laurie Goodman, senior managing director at mortgage-bond trader Amherst Securities Group LP in New York).


What's ironic about this situation is that a multi billion dollar problem was caused by a US$75,000 mortgage.  And, it happened like this.


Nicolle Bradbury bought a tiny little house in Denmark (near the New Hampshire border) for US$75,000 about 7 years ago.  A .couple of years ago, Nicole lost her job and couldn't pay the $474 monthly mortgage payments so the bank (GMAC) started foreclosure action. 


But when the paperwork landed in front of lawyer Thomas Cox things became very non-routine.  Thomas was working at a nonproift legal centre but had worked in the foreclosure industry for years before that - helping to foreclose on homes that small business owners had put up as collateral.


On behalf of Nicole, he succeeded in getting the deposition of a GMAC ‘robo-signer’ who admitted that he didn’t read through the 400 foreclosures he signed each day including Nicole's.  So he argued in the foreclosure case to the Court that - 


'When Stephan says in an affidavit that he has personal knowledge of the facts stated in his affidavits, he doesn’t. When he says that he has custody and control of the loan documents, he doesn’t. When he says that he is attaching ‘a true and accurate’ copy of a note or a mortgage, he has no idea if that is so, because he does not look at the exhibits. When he makes any other statement of fact, he has no idea if it is true. When the notary says that Stephan appeared before him or her, he didn’t.'


The Court rejected GMAC’s request for a foreclosure and said that even when given the chance to file amended documents, GMAC still didn’t even include the actual street address of the house.


And, (surprise surprise) US lawyers are now looking at this case as a model for further litigation.


So, US banks need to check and change their foreclosure processes and probably re-do existing foreclosures to try and avoid the same arguments and outcomes.  It's a big problem that the finance sector, the real estate market and home owners don't really need.


Whether or not we have the same problems in Australia is not clear but I guess many lawyers will check this option now if they can (I would) when representing defaulting home owners.


See you in the foreclosure Courts ... arguing your case.





Francesco ...  

It’s a Taxing Time for All

30 June is approaching and it’s the end of the financial year which means our minds turn to money.

It’s all talk of income (splitting or deferring it),  expenses (and advancing them), exemptions, deductions, capital gains (and losses) and accountants. OMG ...

But, what about strata and community title schemes ?  How does taxation work for them ?

I’m glad you asked because in today’s post I’ll explain the basics about strata tax and cover things in more detail in future posts.

Although a strata or community scheme is not a company it pays tax at the company rate (currently 30% but changing to 28% for organisations with annual turnover under $  million from 1 July 2010).

Tax is payable by schemes on their income.  But this is more complex than it seems and works differently in different parts of Australia.

Income for most schemes is limited to interest on its bank accounts and fees charged for owner certificates and other services. 

Levies from owners are not income of the scheme as they are mutual income of the owners – paid by the owners collectively for their collective use.

Most interestingly though is income schemes earn from the use of common property for things like renting car spaces and storerooms, licensing tables and chairs on common areas, payments for exclusive use rights and leasing rooftops to telcos.  This is considered to be the income of the owners (and not the scheme) where the common property is held on trust for them (for instance in New South Wales).  And, it’s considered to be earned by the owners proportionately according to their unit entitlements.

So, whilst the scheme receives the money, the owners are considered to earn part of it as their income and must declare it in their tax returns and pay tax according to their circumstances on it.

Against that income schemes can typically claim deductions for bank charges, manager charges to prepare the owner certificates and to provide other services and accounting charges.

In almost all cases schemes will pay very little if any income tax.

If the scheme has annual turnover exceeding $75,000 then it must also register for GST and lodge quarterly or monthly BAS depending on the turnover level.  This has recently been increased to $150,000 if they are non profit boides (which most strata schemes are).

If registered for GST schemes must charge and remit GST at 10% on all supplies which include levies made on owners and can claim input tax deductions for all it’s expenditures.

Generally since most schemes spend most of the money they collect in levies they will have input tax deductions that closely match the GST they collect and will also pay very little net GST.

The ATO published a public ruling (IT2505 – Income Tax: Bodies Corporate Constituted Under Strata Title Legislation) on taxation for strata and community schemes which is worth reading if you want to know more.  And, the ATO have a guide that answers a lot of the typical questions about GST issues called Issues Register - Section 01 - Bodies Corporate/Owners Corporations and Strata Managers.


So ... make sure the taxman is looked after this year by your strata scheme.




Francesco ...

Gimee Gimee Gimee … More Real Estate Losses and Tax Deductions

Since we know that investors represent half the owners of NSW strata apartments (see post Whose in the Majority … Owners or Investors in Strata) they are an important stakeholder group and their positions and interests make a big difference to scheme operation.

In the whole investor owners exist for profit motives and the taxation benefits that are available to them.


In a recent article called View Deductions with Care in SMH Domain, John Collett explains how negatively geared property investment works and gives some salient pointers to what’s deductible and what’s not.

The ATO publish a lot of useful information for rental property owners at its website including this guide called Rental properties - avoiding common mistakes which is easy to understand and very helpful.

Interestingly, the article also says that the level of investor owner losses in Australia increased by 43% from FY2007 to FY2008 (from an average annual loss of $3,733 per property to $5,375 per property).  And, that in FY2008 investors reported tax losses totalling $8.6 billion.  That’s a big loss or losses !

I suspect that there will also be an increases in the level of investor owner losses in FY2009 and FY 2010.

That means that on a day to day cash-flow basis investor owners are worse off than before and, in strata, that means they are less able to pay levies on time (or at all) and more likely to want to find ways to reduce (or eliminate) scheme expenses.  This impacts on decision making, scheme operations, managers, scheme suppliers, etc.

Is this what you’re now seeing at the strata scheme level ?

And, remember that negatively geared investment is fundamentally about losing money to get the tax benefits against other income and (hopefully) offsetting the income losses by higher medium and long term capital gains (after GST).  

Francesco …

Interest Rates Creep Effects

It seems that real estate interest rates are continuing to rise in Australia with the Reserve Banks announcement this week of another 0.25% rise to 4.25%.


It's expected that all major banks will lift mortgage rates and most also lifting their credit card, business rates and deposit rates as well to match.  Of the 4 major banks this leaves Westpac’s standard variable mortgage rate the most expensive at 7.26% and National Australia Bank the only bank below 7 per cent with a rate of 6.99%.

Of course this still leaves rates lower than only a few years ago when mortgage rates peaked at an average of 9.36% in September 2008.

But, many analysts believe the rate rises will continue in 2010.

‘There is barely a word of weakness in the bank's statement,’ said IPAC Securities economist Adam Carr. '’It thinks the housing market is still buoyant and that's the only sign of weakness in an otherwise bullet-proof economy.’   And, Westpac economist Bill Evans agreed. ‘They haven't finished raising rates. The statement points to concerns with the stimulatory impact of the rising terms of trade overriding any doubts about the housing and consumer sectors.’

Even Reserve Bank Governor, Glenn Stevens, speaking on the Sunrise program with David Koch this week said ‘We cut interest rates to what we call emergency settings when we had an emergency’ referring to the global financial crisis and ‘once the emergency has passed and things gradually look more normal, then it's not wise to leave interest rates right down at rock bottom any longer than we need.’  


Stevens emphasized the point by also saying ‘And you shouldn't assume they'll stay low because that assumption will prove to be, you know, unfortunate.’

So, its fair to assume that interest rate rises for apartment owners will continue with a range of effects on them, tenants, strata schemes, managers and others this year and next year.

Some of the most likely effects include.

• Owners will have less money left after mortgage payments and living expenses to pay strata levies so levy arrears ratios and amounts will rise.
• Strata scheme cashflow will come under more pressure as receipts from owners slow.  Even a 5% worsening of levy arrears over 12 months means that a block of 50 apartments will be at least $5,000 worse off on a cash basis.
• Strata managers will need to more closely and carefully manage expenses to ensure essential payments can be made on time.  In some cases strata schemes will need to borrow money.
• It will take longer to pay scheme suppliers, putting pressure on them and possibly slowing service delivery.  And, non essential work by strata schemes will be cancelled or delayed.
• Scheme operating costs will increase as more money needs to be spent on strata levy recovery.
• Antipathy between paying and non-paying owners will increase.

So, it looks like it will be another interesting money year in strata land.

Francesco ...