Sinking fund: what is it and what’s it for?

March 26, 2020, 6:06 p.m.

What is a sinking fund?

A sinking fund is an essential financial tool for owners' corporations, i.e. Owners group, body corporate or owners committee, to ensure that the future maintenance/refurbishment expenses of a strata building can be met.

What is the sinking fund For?

Sinking funds are to cover the cost of future common emergency expenses or major capital works.
We will use a house as an example. If a tile on the roof is loose, that repair is covered by the Maintenance Fund. If you have to replace the whole roof, that cost is allocated to the sinking fund.

How are sinking funds calculated?

Using examples from other countries, sinking fund fees are calculated based on an audit of the building known as a sinking fund forecast. This audit is undertaken by a suitably qualified surveyor engaged by the owner’s corporation. This audit looks at the condition of the building, plant and machinery, and calculates the life cycle of these items, forecasting either the plants’ replacement or refurbishment in a set number of years, for example, 7, 15 and 20 years from the date of the audit.

The audit will also calculate what these works may cost in the future. These costs will be broken down into per lot fees paid either monthly or annually, to be held in trust by the owners’ group until the refurbishment is required.

Without an established and well-managed sinking fund, owners may find themselves facing extensive costs in the form of special levies. These costs can be considerable, particularly if there are catastrophic construction defects or the need to replace equipment such as elevators.

Although the Cambodian Government introduced the 2009 Sub-decree on the Management and Use of Co-owned Buildings that requires “ the co-owners to establish a management board or an executive committee as agreed among themselves following the prescribed internal regulations” the requirement to establish a sinking fund and its associated requirements are not completely covered by this decree.

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