Tuesday 20 February 2018

Insolvency a risk owners must account for with management companies

The right moves

OMCs are set up for the purpose of managing multi-unit developments
OMCs are set up for the purpose of managing multi-unit developments

Paul McNeive

The Masters in Real Estate course run by the Dublin Institute of Technology (DIT) is a great route into the property business for people with an honours degree in another discipline. It strengthens the property industry by adding experience and new viewpoints from other professions.

One example is Adele Murray, who has a degree in accounting and finance, and was working in the accounts department of her father's firm, Macfar Property Management, in Balbriggan and Dundalk. She now specialises in property management, and an impressive study completed as part of her Masters has identified problems with the operation of Owners Management Companies (OMCs) - not least, the risk of insolvency.

OMCs are set up for the purpose of managing multi-unit developments (MUDs.) OMCs are responsible for the management, maintenance and control of the commonly owned areas, and for collecting service charges. Each owner of a property on a scheme, whether residential or commercial, has one voting right. Murray's study identifies challenges in the collection of these charges, and in complying with the Multi-Unit Development Act 2011, which was enacted in an effort to deal with issues in the sector. For example, the Act makes it compulsory for OMCs to maintain a sinking fund, to cover major capital costs such as lift replacement.

With over 10pc of Ireland's population now living in apartment schemes, and with that figure likely to rise, it is vital that the OMCs operate properly, both to protect the quality and amenity of each development, and the value of each property, as a unit on a badly managed scheme can have its value reduced - and, at worst, become unsaleable.

Murray's study involved analysing the published accounts of 50 OMCs running developments in the greater Dublin area, interviewing stakeholders such as property owners, managing agents and accountants, and a survey which received more than 80 replies. Several issues became apparent around the financial stability of OMCs in Ireland:

* 30pc of the 50 companies analysed have debtor levels greater than half of their annual budget for running the development, and 54pc of the companies had an increase in debt levels over the previous year.

* 18pc of OMCs have debtor levels of over 100pc of their annual budget. In the short term, these companies can survive by reducing services and continuing to pay insurance premiums, agents' fees and electricity costs. However, they cannot establish and contribute to a sinking fund. This leaves the schemes vulnerable to a capital cost that cannot be met, such as a major repair, or a fire alarm system becoming obsolete.

The report suggests that the risk of insolvency among some OMCs is partly due to the difficult process for debt collection, inconsistencies in providing for bad debts in annual accounts and a lack of understanding of the obligations associated with purchasing a unit in a MUD.

High levels of service charge arrears mean that management companies are unable to function properly and a 'downward spiral' results. The managing agent is forced to reduce services, which sometimes sees compliant owners refusing to pay, which worsens the problem. At worst, the agent may resign due to non-payment of fees, accounts are not filed and the company risks being struck off.

There was general agreement among respondents that most bad debt on schemes is caused by the same small number of owners, who refuse to pay over a number of years. The slow legal process doesn't help and as one agent commented, "judgements don't turn into cash". Service charge arrears are also subject to the Statute of Limitations (six years) and OMCs are sometimes forced to attach judgements to properties, in the hope of being paid when the property is eventually sold.

Other interesting points I noted are that owners of houses are less likely to pay their service charge than apartment owners and only 68pc of owners of houses said that they were aware that they would be liable to pay a service charge. There's a message for agents and solicitors there.

The report indicates that 20pc to 30pc of property owners are not paying their service charges and are in arrears.

Adele Murray told me that the key to better service charge collection is transparency around charges, good communication and encouraging owners to develop a sense of community.

I have only scratched the surface of this analysis and the full report is available from adele@macfar.ie.

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