How many years should you plan for?
That’s entirely up to the owners. They are the body corporate and it’s their plan.
But 10 years is generally regarded as long enough even though some academics might suggest it should be for much longer - even up to 35 years - and for sure, some large publicly listed property companies might like to forecast that far out. But in reality, that’s just for looks. Because when you think about it, nobody has a clue about what’s going to happen more than 10 years out.
Also some plan builders might try to bully you into having a plan over 30 years. They might even have some convincing arguments around technical and theoretical best practice.
But that's rubbish. It's not a university assignment and they just want to sell you something that looks awesome.
Tell them yeah nah. Just 10 years thanks.
Remember it's the owner's plan
But back to the owners. If the majority of owners want 35 years, then that's what you should do. Remember it's the owners plan. But if they're happy with 10? Like we say. It's their plan.
Typically owners think 10 years is enough because they aren’t worried about how flash the document looks, or academic ideology. They want a plan they understand and can budget for.
Also most unit owners don’t expect to be owning the unit much longer than 10 years and the thought that they might be putting away large unneccessary sums of money in the body corporate's bank account for the benefit of the next owner is a bit hard to swallow. And fair enough.
There's an article here on how much should be in your fund or reserve.
The inter-generational issue
Then there’s the inter-generational debate. Many unit owners are retired and expect that the asset, or at least the proceeds of its sale, will be handed over to the kids one day. While these more senior owners are generally happy to pay their own way, including any maintenance required over the next rolling 10 years, try explaining to them that they have to plan for maintenance that will be carried out long after they have departed this world and you had better be a good presenter.
Logic and common sense
Then there’s pure common sense. Nobody is able to accurately predict what the level of inflation will be next year, let alone in 35 years. Nor the exchange rate, the price of oil, immigration, the cost of building materials etc, etc.
Tradies like their quotes to expire after about a month, such is the uncertainty.
So while you're trying to do the right thing, if you’re trying to forecast longer than 10 years, it’s just a feel good thing. You actually don’t have a clue about what's going to happen beyond 10 years.
But what you say, if a big ticket item is coming up just outside the 10 years?
OK, so what if you have a big ticket item - like replacing the roof - that you want to forecast in say year 12?
Well you have several options. But first let’s agree that building items like roofs don’t have an expiry date. Sure there are manufacturer's recommendations and warranties but that's just them butt covering.
Let's also agree that while there might be one or two items you might expect to fully replace because they have deteriorated beyond repair, you're not going to replace things like your windows because they have supposedly reached the end of their theoretical useful life. Someone might suggest this based on some sort of acedemic best practice but in the real world nobody would do that. So you shouldn't budget for it. But that's a topic for another article and we'll post that soon.
But back to the roof and the topic of how many years should your plan forecast.
Let's say you've been advised that it is deteriorating and will be due for replacement in year 12.
That might be a good guess but equally it might be in year 10 because it’s too far out to be accurate.
You might even be able to repair or repaint it and make it last forever. That's how come we have heritage buildings.
Yeah, yeah but I still want to provide for it
OK. Say you have at least some certaintly and still want to schedule it in year 12 and try to budget for it. Well, you can still have a 10 year plan.
Here are some options. Note: They all involve having a decent closing balance in year 10.
You could put the job in year 10, so it appears in the plan and everyone is aware of it. But hang on, you say. It isn’t required until year 12. Oops, you forgot, you don’t know that. Remember? But it doesn’t matter anyway because even if you schedule the job in year 10, it doesn’t mean that you have to plan to have the funds available in year 10. It’s just a flag. Also, when you roll over next year, you put it back in year 10 - which is now the 11th year. On this basis it will only take two years for year 12 to become year 10 anyway.
You could schedule a job in year 10 called “contingency for replacing the roof”, or whatever. It’s the same idea. You’re just putting up a flag so that everyone knows there is something coming up that you need to plan to have the cash for.
Don’t schedule a job. Just make sure you budget to have a good closing balance in year 10. That’s simple enough.
The point is that 10 years is plenty of time, especially if you roll over your plan every year. That way you will always have a 10 year horizon to look at.
Keep it simple
Some of these suggestions might sound like shortcuts or a lack of accuracy but they're not. Let's say it again. You can't be accurate. Just about everything past next year is a guess. While it might look like you've got a detailed and accurate plan, it's only detailed. It's accuracy is a myth.
More important - and considering the name of this website - for best practice, your plan should be easy for your owners to understand and embrace. It should also be a genuine tool that you use and follow. To achieve these goals it needs to be as simple as possible while maintaining a minimum level of accuracy.
Manage the owners cash carefully
Also every planner also has a duty to manage their owners cash very carefully. Sure, you need to be confident the body corporate has enough cash on hand to pay for the work planned in any year of your plan but 10 years out should be plenty long enough to start increasing levy contributions for any typical planned maintenance or replacement job.
The other thing to consider is how much cash should you have in your reserve anyway and we’ve created another article on that.
Prepared by: John Bradley. August 2016