04.11.2023
From time to time, Cypriots have complaints that in Cyprus it is not customary to create sinking funds in common property (apartments, integrated development projects).
There is confusion about what a sinking fund is.
Total costs, as the public understands them, are all costs necessary to properly run or manage a project. These costs include electricity, sewage treatment plant repairs, private road and street light repairs, and project management fees by the committee or administration. This is something that is widely understood by the public and, in most cases, tenants refuse to pay even basic expenses. This creates a huge deficit in the finances of such a general spending fund, which in many cases leads to the stoppage of services such as the operation of elevators, swimming pools, repairs of private roads and so on.
A sinking fund is a fund with contributions from all owners to create a fund of sufficient amount to repair or replace equipment and provide money to “rebuild” a project that may be understood to be unable to maintain its original standard forever.
Here we are talking about another fund, in addition to the general expenses fund, which (in theory) should be kept in a separate account and used when the time comes for work and major repairs.
The problem here is that the cost of basic project management will increase significantly when the sinking fund bill (be it the difference between tenants and owners) comes into force.
As a general guide, mechanical installations will require replacement and are a major investment over their lifetime, or over a service life of approximately 15 years. In contrast, for buildings, the “replacement” period can reach 20–30 years. Thus, the two proposed funds are separate because the general fund relates to the day-to-day operation of the project, the costs of which are collected from the tenants, while the sinking fund is collected from the owners.
The two concepts are related in the sense that if the general fund is not paid and thus the life of the equipment and buildings is reduced, the owner will be held responsible.
Then you have another problem: buyers have to pay for the sinking fund within a very short period of time, not because the common expenses are not paid properly, but because the previous owner does not contribute to the sinking fund. Thus, the new buyer may have to create a shortage (which is very unfair). However, more importantly, the new buyer/owner will likely not pay.
In a recent experiment, the total value of the sinking fund reached twice (and in some cases more) the value of the general fund, depending on the state of repair of the building or project.
While general fund expenses are placed in a general “cash pot”, the sinking fund, depending on the management, the owner’s account should only be credited against the funds owed to them.
Another confusion is the issue of tenants not paying common expenses due to a disagreement between the developer and the previous owner who failed to fulfill his obligations under the original construction and sales agreement. These remedies are two completely different issues, and it adds to the whole mess we’re in, while the occupiers’ failure to comply with the master agreement includes things like “the neighbor is using my parking lot” (and other serious disputes we’ve experienced that includes two stab wounds and gunshot wounds).
Such huge differences stem from residents’ attitudes towards the interpretation of their ‘rights’. New (pending) legislation will address many unresolved general spending issues in the future.
