Revisiting sectional title levies – What exactly are you paying for?

Why are body corporate levies so high? On the 3 May 2021, Auren Freitas dos Santos – founder of The Advisory – featured as the guest speaker on the Private Property podcast, discussing the necessity for sectional title levies, and what they fund.

 

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Video transcript:

Zamantugwa Khumalo: Sanbonani, dumelang, good evening, and welcome to episode 251 of the Private Propoerty podcast.

This evening, we are tackling something that I know a lot of us tend to worry about. I’ve often even admitted myself that this is a pressure point, becuase many of us live in Sectional Title communities. I’ve recently moved out of a Sectional Title community, thankfully, so I don’t have to deal with some of the stresses – my guest is laughing in the background – I don’t need to deal with some of the stresses and horrors of living in a Sectional Title community right now.

But, I manage properties in Sectional Title communities, so this is still something that is very relevant, and I have to keep my fingers on. We are talking about Sectional Title levies and what exactly we are paying for. And what we are going to be exploring this evening is, first just starting off with what a levy is. You know how I like to take it down to basics, we must not assume that we all understand some of these topics that we explore at home. Perhaps someone is new to the show, and still isn’t quite clear about what a levy is.

We will be exploring what exactly we will be paying for, and how that amount is decided. You will find that, especially if you have multiple properties, or perhaps you have had this conversation with your friends, you might be paying let’s say R90 for levies while your friend or colleague, or even family member, is paying R3000 for levies. So we want to get a sense of how exactly is this amount calculated?

In the event where you perhaps want to look at getting a reduction in your levies – not a lot of people know that there is a potential way you can get a discount on this – so do find out how you can go about getting a discount, expecially given how levies keep going up. I was complaining about this just last week; that the cost of levies has actually become quite ridiculous. So we need to find different ways that we an mitigate that cost as much as possible.

This evening, I am joined by somebody who needs no introoduction to this show: Auren Freitas dos Santos, who is the Founder and a Director at The Advisory. Auren, good evening and thank you so much for joining us.

Auren Freitas dos Santos: Zama, happy Monday, and thank you for having me on the show.

Zamantugwa: It’s only a pleasure, Auren, it’s always so great to speak to you. I want to get straight into it. So we are talking levies; we are looking at what we are paying for. I know many viewers at home also have this as a pressure point, especially when it comes to living in Sectional Title communities. What is a levy? Before we look at what we are paying for, how it is calculated, and all those logists; what exactly is a levy amount?

Auren: I think those that have their property goals for this year to purchase a property might not know the first thing about a levy, and it might come as a very big surprise to them. But the listeners that are involved in community schemes, and that do own properties, are well aware of what a levy is. So, for those who don’t know, levies are contributions that you as an owner make to a body corporate, in order to fund the running of your body corporate.

So, you mentioned Zama that you have just recently managed to ‘escape’ from a community scheme, so I am assuming that you live in a free-standing home now, so you are solely responsible in your current free-standing home, for everything related to your property; painting the roof, gardening, the security fence, all of that comes out of your own pocket. But, in a body corporate, because we share everything in the body corporate in terms of common property, the owners are responsible to make contributions to fund that.

Your levies will typically fund things like the utilities – water and electricity – the insurance of the buildings, security is a very big ticket item in most bodies corporate. Paying security staff to be there on site, as well as off site monitoring is also a big ticket item. And then your building maintenance, as well as maintaining your common property facilities like your swimming pool and your tennis courts. All of that costs a lot of money to maintain. And then you have your staff costs; if there is a gardening team on site, or an estate manager. And then finally, your managing agent makes up a big portion of your levy, too.

So all of that effectively has to be paid by the owners, and the way that it’s paid is: the size of your section determines the amount of levies you contribute to your body corporate. If you own a larger section, for instance if you are lucky enough to own the penthouse, you would typically pay the most towards levies. You always need to be mindful of that when deciding on which section to purchase in a community scheme, have a close look at the size of the section that you are considering purchasing. Also very importantly, when you are budgeting to purchase a property, the common mistake is that you focus a lot on your mortgage bond and how much those repayments are going to cost you, but you forget to factor in your levies.

I’ve seen outrageous levies, levies that cost R15 000 a month! So, be very aware of what your levies are before deciding to purchase.

Zamantugwa: And Auren, when you talk about high levies, one of the big things with high levies is oftentimes, whether for residential purposes or you are looking at an investment property, you are able to justify the costs of the levy amount if you are getting certain services. But, what you typically tend to find is that there are quite a number of Sectional Title communities where the levy amount does not correlate with the types of services that you would get. So, whether it is a homeowner or a property investor looking to buy into that community scheme, you don’t quite understand why the cost is as high as it is.

Now Auren, one of the other things I want us to explore is: why is it important for us to pay the levy amount? I’ve heard far too many people, who live in Sectional Title communities, who also just want to do their own thing, don’t quite understand why levies need to be paid, sometimes think ‘I will pay one month and not another month’ , or some of them just don’t feel a sense of ‘this is an amount you are actually required to pay’; you don’t opt in or opt out of it, you can’t choose to pay a certaim amount and not another amount. So, what is the importance of us actually having the levy amount, and making sure it’s paid on time? I know that this has a ripple effect when owners do not pay their levies on time.

Auren: So, apart from the legal obligation that you have in terms of the Sectional Titles Management Act to pay your levies, as you would for instance have to pay your tax towards an estate, apart from that obligation that you cannot escape, the more pressing issue is that your investment in your section that you have purchased in this community scheme will depend greatly on the effective management of your body corporate. So if you have non-payers or defaulting payers in your scheme, that affects the bottom-line of your body corporate, and therefore that body corporate won’t be able to undertake very important work; like maintaining your building and ensuring the gardens look great, and just uplifting the building to ensure that you get the maximum return on your investment. So, it’s in your best interest to pay that levy, and it’s also in your best interest to pay becuase if you do default on your levies and the body corporate obtains a judgement against you, you are then effectively barred from participating in the business of your body corporate. If there is a judgement against you, you won’t be able to vote at your AGM, and you won’t be able to have your say.

You have to pay, to play, in a body corporate.

What you mentioned is also important, that some owners in body corporates feel that they are not getting their bang for their buck – what they are paying compared to what they are getting don’t correlate. That is why it is so important to understand that levies are not just a thumb-suck figure that the trustees dream up overnight and decide to bill you with. It takes a lot of work to determine a levy amount and you have to budget very thoroughly – as you would for any business really; you need to look at every line item and understand what is the purpose of that line item, how can we maximize the value out of this line item, and is there a cheaper service available for the same service? Look at that and make sure that whatever is in your budget is in fact being carried out at the end of the day.

That’s the only way you can actively monitor that, is by understanding what your budget entails, and then going to have a look on the ground; is the pool actually being maintained correctly, is the building being maintained correctly? If it’s not, you go back to your trustees and you say to them: “We’ve approved a budget that allocates a certain amount of funds each year for this area of my body corporate, and you are not attending to that maintenance. So please can you make sure that you do that, as that is what my money is meant to be used for”.

Zamantugwa: A question came in: In some complexes, you find them charging R2000 plus, where they don’t even have a jumping castle for kids to play. The complex would be plain and not properly maintained. You’d ask yourself: “What is this money used for?”

We have another question asking: Who determined the square meter rate used to calculate levies?

I love this question because we made reference to it. Auren, we know that it is based on the square meter that each unit has, so who exactly determines the rate of levies for the respective properties?

Auren: For that, we can have a whole conversation on the principle of square meter charging and what we refer to as participation quotas. In a lot of different jurisdictions, for instance, in Europe some of their Community Schemes base it on a cubic space – so the entire space of your building, others base it on your property value. Africa has decided to base it on your floor area. Your floor area is determined in terms of your Sectional Plans. If ever you wonder what your PQ or your floor area is, obtain a copy of your Sectional Plan and on the last page will be a list, what’s called a PQ schedule, and that allocates a PQ to every section. So your section floor area is divided among the floor area of all the other sections in the scheme, and then that is rounded off to a 4 decimal number, and that’s your PQ. Your voting right is determined by your PQ, and your levy obligations are determined by that PQ.

There are always debates about whether PQ is the right way to do this, should we not rather base it on a property value, or where you are situated in a building, but our legislator has decided that this is the best way to approach sharing costs in a Community Scheme.

Zamantugwa: We have a comment coming through that says: “I attended an AGM meeting once and I’ve got to say I understood why tenants pay levies, and most times the levies that are being paid do not cover most of the daily running of the building or complex.” This is why it is so important to attend your AGM’s because a lot of these questions get answered. Your eyes get opened up to how your complex is being run, and you are also able to sense when something is not right as AGM’s have a way of showing when things are not right. You can just see from the way things are being conducted, to the way things are being reported on, to the way questions are answered or not answered, you are able to get a really good sense of what exactly is happening and whether the complex is being run well.

Another comment: “I pay about R1700 per month in levies, this includes water, cleaning & general maintenance, security, building insurance, etc. It’s worth every cent I spend. I get a peace of mind”. That is actually really good value for money!

We have a question: “Is it compulsory to pay a maintenance levy apart from paying the normal levy every month?”

Auren: That’s a very good question. The maintenance levy that you’re referring to is what we call a reserve fund levy. It is a new concept that has been introduced in terms of the new Sectional Titles Schemes Management Act. In 2016, the legislator when enacting the new Act, decided that there is a desperate need for bodies corporate.