What is a sinking fund?
A sinking fund is a sum of money payable by the tenant, which is normally held by a landlord’s managing agent on their behalf. It is used for items of capital repair to update or replace existing infrastructure within a building such as heating systems, for example.
Whilst sinking funds aren’t appropriate for each and every landlord, they can prove to be an effective way to create and maintain a high standard of property, whilst also protecting tenants against the impact of larger expenditure on shorter term leases.
How does it work?
The money is accumulated against a long term plan known as a lifecycle or planned maintenance plan. The landlord’s managing agent will create the plan which will enable both landlords and tenants to gain clarity around what the sinking funds have been and will be, spent on, and how they will benefit.
Once created, the plan doesn’t sit in a file never to be seen again. It is the job of the expert managing agent to use the plan to ensure that the landlord can be responsive to changes in property specifications or the wider market.
The plan is a constant reference point for the managing agent, and is regularly updated and adjusted to reflect the performance of the economy, as issues such as Brexit impact the sector, for example.
As money in the sinking fund accumulates, the sums are held in interest bearing bank accounts.
How are they managed?
Once established, they are administered by the managing agent on behalf of the tenants. The agent uses the funds to ensure that capital items are replaced in a timely manner to suit today’s requirements.
This will mean that the property is able to meet specifications like the recent minimum energy efficiency standards (MEES), which can be achieved by using the funds to make forward thinking repairs, such as using sustainable technology to replace dated heating systems.
To make the most of the sinking fund, however, it’s important for landlords to seek professional advice early on so that the funds can be established as early as possible.
This allows for continual improvement of their property portfolio and can result in high occupier retention in the long term.
This is exactly what happened when we began working with the award-winning University of Southampton Science Park (USSP) back in the 1980s.
How we used sinking funds to help University of Southampton Science Park
Set in 45 acres of attractive landscaped surroundings, the University of Southampton Science Park aimed to be one of the top university-linked science and innovation campuses in the UK, providing high quality office and laboratory space for vibrant and high-tech businesses.
When our expert property asset management consultants began working with the team at USSP for over 35 years, we worked hard to understand their long-term property goals, so that we could achieve them through effective real estate portfolio management.
We did this by recognising early on the value that the use of sinking funds could realise, and our managing agents established the funds at the beginning of the development.
Together with significant investment by the landlord, sinking funds have helped replace heating systems, update air conditioning across the site, and significantly invest in the replacement of electrical installations.
The landlord also committed to additional work to improve insulation in the properties, helping to increase energy efficiency significantly across the Science Park, as well as investing in significant data provision across the property.
What was the result?
Through use of sinking funds, we have helped USSP to create a significantly better environment for its occupiers, and increase the longevity of its tenants’ commitment to the Park.
Not only this, the EPC rating across the Park has increased from a low D to a high B as a result of significant improvements to energy efficiency. This has made it a much more attractive proposition for potential tenants, as well as investors, whilst improving secondary rents too.
It is fair to say that there has been no sinking feeling about investing in this science park!
On the contrary, through intelligent facilities management, use of sinking funds has helped USSP not only to achieve its property aims, but to win the prestigious accolade of Business Park of the Year in 2016 and Work Place Environment of the Year in 2017, at the South Coast Property Awards.
It just shows that with the advice of an expert team of Property Asset Management consultants, it is possible to implement a forward-thinking facilities management strategy, whilst managing the relationship with tenants, securing regular rent collection, and marketing a site with a team that knows it inside out.