RERA’s new rules on Reserve Fund Payments

 

The new rules of RERA to improve the overall maintenance of the buildings and enable FM companies to adhere to the highest standards.

 
By Hamza Betraoui, Managing Director, Land Sterling, June 5, 2023 Real Estate
 

RERA’s new rules on Reserve Fund Payments
 

The new rules that the Dubai Real Estate Regulatory Agency recently released is that in addition to bank approvals on a building's reserve fund disbursements, RERA also requires the approval of a third-party consultant to authenticate the payment releases versus quotations obtained by the Owners Association Management (OAM) company. This will create another layer in the approval of CAPEX spending from the Reserve Fund account to bring more control, accountability, and transparency.

After implementing the new circular, there is a four-stage approval process that provides more safeguards to Reserve Fund account usage.

Four stages of approvals:

  • Building Management
  • Certified Property Observer
  • Bank
  • RERA

Certification/validation of Reserve Fund Account usage by a Certified Property Observer will ensure Owners Association (OA) get value for money and enjoy the benefits of proper Asset Life Cycle Costing before CAPEX spending. This will ensure better financial health and a longer building lifespan.

Going forward, this has created the groundwork for asset-wise Reserve Fund Contribution collections where each asset has a "stand-alone Reserve Fund Account." In addition, This has helped to promote a 100%-funded Reserve Fund cash-flow projections, which is a big step towards preserving asset value and deriving utility for longer.

There are no exceptions to the new rule since it is not asset-specific. Rather it is applied to all CAPEX spending. However, more clarity is given when it comes to the number of quotations required on the CAPEX threshold:

  • Three (3) quotations if the proposed CapEx is below AED100k
  • A minimum of six (6) quotations if the proposed CapEx is above AED100k

Under the new rule, the scope of 3rd Party Certified Property Observer includes the following:

  • Quotation verification
  • Life Cycle Costing to validate the need for proposed CAPEX
  • Establish asset Life Expectancy
  • Establish asset Effective Age
  • Establish asset Estimated Remaining Useful Life
  • Inspection to establish current asset condition
  • Confirm if the proposed CapEx is planned for in the existing Reserve Fund Study
  • Obtain the current Reserve Fund Account balance to confirm if it is adequately resourced to finance the proposed CapEx
  • Confirmation of Work Completion

The real estate consultancy which holds a property observer activity is to prepare a Reserve Fund Usage Validation Report that is clear and acceptable to RERA.

The documentation required from the OAM company to prepare the report is as follows:

  • Current Reserve Fund Study
  • Current/Actual Reserve Fund Balance
  • CapEx History - Proof
  • Client-sourced quotations
  • Operation and Maintenance (O&M) Manuals
  • Planned Preventive Maintenance (PPMs)
  • Annual Maintenance Contracts (AMCs)
  • Work Completion Report -with pictures (upon completion of work)

This new rule will allow OAMs to improve the overall maintenance of their buildings. Moreover, it will enable them to push FM companies to adhere to the highest standards. Well-maintained buildings give a good perception of the management company in place, thus facilitating the collection of service charges from the owners. The beneficial impact this will have for the owners is that their property prices will remain high/stable, demand for rentals in the building will increase, and utility bills will eventually reduce since the property has periodic maintenance. From the government's perspective, well-maintained properties mean Dubai has a robust and inviting real estate market. From a market point of view, the government has stepped in once again to ensure that the prestigious image of the Dubai real estate market is maintained and that future generations will continue to benefit from these reforms. 

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