The Importance of Asset Management

A building should be viewed as an asset by the leaseholders that reside within it and contribute towards its maintenance and the services provided.

Most leaseholders will take the view that the economic value of their investment resides within the four walls of their flat, and while not inaccurate, does not represent the full picture.

The full value of a leaseholder’s investment can only be realised within a building that has been effectively managed from a long-term maintenance point of view.

The planning and implementation of a structural and cyclical maintenance program for a building are generally what asset management involves.

This includes ensuring that a building has adequate funding in place to have this done.

Every building should have an up to date Asset Management Plan which will dictate the frequency and costs for projects such as:

• Roof replacement
• Lift replacement/modernisation
• Internal and External Redecorations
• Boiler replacement

Also known as a Capital Expenditure Plan, a full structural survey will need to be carried out to assess the physical and visual condition of a building and any machinery or equipment that it has.

Items such as garages, basements, parking spaces, and the land the building sits on will also be included and will be considered as the building’s Assets.

This will determine when major repairs or replacements will need to take place as well as providing an estimated cost for each item within the plan.

These schedules can be produced in five or 10-year cycles, however, the most used format is the 10-year cycle also known as a 10-year plan.

This is an essential tool for successful block management and the presence of an operational asset management plan and a Reserve Fund to match, is a strong indicator that a building is being managed well.

Indeed, this is information that potential buyers often ask about as part of the solicitors’ enquiries raised during of the process for buying or selling a flat.

From a Landlord’s perspective, they can take a proactive approach to the maintenance of a building that forms part if their obligations under the terms of a lease.

Similarly, such a long-term planning and funding will ensure there are contingencies in place for any other large-scale expenditure that may fall outside of a day to day maintenance budget.

From the Landlord’s perspective, they can budget and plan efficiently, and form a leaseholder’s viewpoint, they know what, and why they are paying towards the fund(s).

It would be difficult to provide an accurate picture of asset management without covering the topic of Reserve or Sinking Funds, as they are directly linked.

 

Sinking/Reserve Funds

These terms are generally used interchangeably by leaseholders and while the functions are similar, there is a key difference.

Often written into the terms of a lease for a property will be the stipulation for the Landlord for a Sinking Fund or Reserve Fund.

A Sinking Fund would usually be set aside for a single large-scale maintenance project such as a roof or lift replacement and is ring-fenced from spending on other projects.

A Reserve Fund would be set up to make provision for the cyclical maintenance of a building that forms part of the Landlord’s responsibility but is also available to use for any other large scale expenditure that may fall outside of day to day maintenance budget.

Contributions are non-refundable and will sit with the property even if a leaseholder should sell their flat and no longer have an interest in the building.

The aim of setting up any of these funds is not only for the Landlord to fulfil the obligations stipulated within the lease, but also to provide a cushion for leaseholders on large scale expenditure required for their building and avoid additional service charge demands being issued.

The presence of Reserve/Sinking Fund with a healthy balance is a strong indicator that a building is being managed effectively and is in a strong financial position.

This is because the rate and level of annual collection of funds is usually dictated by an asset management plan for the building that sets out future projects and their costs.