Service Charge: How Do We Create Budgets?
21st Dec 2021
Depending on when your financial year runs, around this time of year, many leaseholders will be receiving service charge notices. But what goes into budget preparation?
Reading your lease
During hand over, a copy of the lease is essential to help us prepare a budget and send demands that are done in line with the lease and TP1. The lease will normally set out when the financial year runs, how often and when payment should be demanded, the percentage of the overall cost you pay and what can or can’t be included within the service charge budget.
If a budget is prepared that doesn’t sit in line with the lease, and a leaseholder noticed that the demands going out were not in line with the TP1 and then decided to stop paying, or even requested a refund for any demands sent not in line with the TP1 beforehand, they could potentially get all of their money back.
What sets Blocsphere apart from other Managing Agents is that the team at Blocsphere read through each lease thoroughly and check what can be charged as service charge or not. Every lease is different, and some things may be required under a service charge for one building and not for the other. We always read through the lease of every new property we take on and make sure the leaseholder is paying the correct amount of service charge for their building.
Previous financial year
Along with reading a copy of the lease, we also tend to look at the previous financial year. Looking at the expenditure and final year accounts helps us determine if we estimated the correct amount. Usually, if we must credit leaseholders accounts, we will look to reduce the amount estimated in the next budget.
Initial site inspection
When taking over new developments, we always recommend our Property Managers do an initial site inspection before we finalise a budget. On the initial inspection we will make note of the communal grounds, condition of the building and internal areas. This allows up to pick up on any defects. A site inspection is always recommended when completing budget tenders.
Initial meeting with leaseholders
Along with an initial site inspection, when taking on new developments, our Property Managers will also set up a meeting with the directors and residents, we find this is a great opportunity to meet with the new owners and voice the proposed plans for the next year. We work for the development so it’s important to understand what the property owners want to see improvements on and what they expect in the new year.
When finalising a new budget, we will look at the contractors that are currently in situ at the block. Are we happy with the quality of their work? Are they still good value for money? If we feel we are no longer happy with the quality/value of our current contractors, we will look into regaining new quotes for the proposed work and budget for this.
Once our Property Managers have all of this information set out in front of them, they will work with our accounts team to finalise the budget. A budget is set because we do not know in advance the exact amount it will cost us to provide services or repairs. Blocsphere estimates the cost-of-service charge for the coming financial year by looking at previous costs and changes to the services provided to residents. Also included are the changes in cost of contacts provided by the suppliers of services to Blocsphere and expected changes in VAT and inflation over the coming year.
As mentioned, we can’t know exactly how much things are going to cost, but this is where our expertise comes into play.
Our goal is to create a budget that is affordable and fair, but also sits in line with the lease. We work closely with the Resident Management Company (RMC) to ensure all their desires are covered at a good value for money.