Each year, service charge contributions create a surplus that can be better utilised to generate better yields and in turn reduce property-related fees. Image Credit: Gulf News Archive

Let’s talk about the mandatory contribution that homeowners have to make into capital reserves and to general reserves.

The former is in terms of the prevailing guidelines on service charges, whereas the general reserves reflect the budget surplus year-on-year.

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The point I would like to make here is: What should be the connection between the owner who contributes to both these funds year-on-year and the fund’s balance in the community at any point of time? The question is pertinent since the onus of payment of service fees is legally on the owner and not on the tenant (when it comes to a leased property).

An owner typically pays approximately 9 per cent of his service fees towards capital reserve fund year-on-year (based on my experience), whereas the contribution to the general reserves will depend on the surplus in the budget over actuals. Again, my experience is that generally budgets are on the higher side and invariably result in a surplus at the end of each year.

Extent of rights

But does the owner retain any actual stake in the fund to which he has contributed?

Contributions to the capital fund are for future use, and thus there is always a possibility the owner is contributing funds for a future that is uncertain. And thus there is athe possibility the owner’s contribution is actually not finally for his own use – if he ends up selling the property. So then, isn’t this tantamount to the current owner saving out of his own funds for the betterment of others?

Cannot cash out

What happens to this stake should he sell the property? The way the system functions today, the fund is in the control of the developer and is for all practical purposes at their disposal since the owner does not really have any powers on its utilization. And there is no transparency in the way these funds are used to earn income for the community.

In addition, I feel that the owner tends to lose should he sell the unit all that he has contributed over the years. I believe this is not fair. I believe that both funds - capital reserves and general - should be in some way linked to ownership and pass on with change of ownership.

Keep a cap on payments

The contributions to the reserve fund should be minimum, and the risk part of the property maintenance be covered by various insurances as is generally done. The transitory nature of the population would also justify such a tranisition.

The management of the fund must earn reasonable income for the community that in turn will enable service fees to drop further. Distribution of dividends from income of the fund by societies in other parts of the world is quite common. My experience so far is that reserve funds hardly generate any income, and that obviously is not in the interest of owners.

I believe that the yearly surpluses (general fund) should be adjusted year-on-year in the ensuing service fees in the best interest of investors.

To my knowledge, in the post-COVID-19 days, a majority of property management companies here have either dropped their employee numbers or retained the same at a discounted salary. So, why does the management fee not see any drop? At least I have not seen any drop.

A drop in 2020 service fees on this account can surely help in these tough times. I realize, with some envy, that property management companies are best suited to withstand the effects of COVID-19. At this point of time, with a reduced salary bill, they actually have a more favorable commercial equation...

- Gautam Patel is a Dubai-based homeowner.