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3. Can it manage complex service charges?
For both commercial and residential properties, the service charge process is regulated by RICS. The software must fully support compliance.
The service charge year end date is fixed in the lease and cannot be varied without agreement by all tenants. However, this year end date is not fixed to the property owner’s main financial accounting period, and can vary from property to property within a portfolio.
The property management system must therefore be able to handle a property’s service charge accounting using an independent financial period.
It must also be able to adopt the correct treatment for VAT on costs – which can be different for Residential and Commercial properties, dependant upon whether the property in question is VAT-applicable.
A true commercial property software system must be able to manage service charge budgets in periods that are linked to the service charge year end date – again, not necessarily the same dates as other financial budget reporting periods.
Often, services supplied to a property are not applicable to all tenants within a single building (why, for example, should a ground floor tenant pay for lift maintenance?), and so separate cost centres are needed, known in the industry as “Service Charge Schedules”. The property management system must be able to cope with these Schedules and allocate costs accordingly, if it is to allow accurate calculation of each tenant’s apportionment.
RICS service charge rules dictate that each property’s service charge account be treated as a separate fund, and never overdrawn. The system needs to control this, both in terms of the financial commitment when purchase orders are created, and at the point when payments are generated.
Budget vs Actual: it’s also a RICS requirement that tenants are kept up to date with service charge spending at periods throughout the year, and that they be advised as soon as possible of any significant overspends, before the year end.
Year End Reconciliation and Balancing Charges: as soon as possible after year end, the landlord must produce a certificate of expenditure for the service charge year and, in a similar way to the Budget process, the property system needs to calculate these apportioned shares and deduct “payments on account” from the budget process to produce a balancing charge or credit.
Again, the property management software needs to produce separate calculations and documentation for each tenant, with explanations for any variations from budget.
Automation: yes, service charging is complicated! Which means you need a system that encourages maximum automation – sending out correspondence and accurate statements to tenants as necessary – and it needs to be supported by extensive intelligent exception reporting, able to flag up any errors before they become costly mistakes.
Given the complexity of Housing Association tenancies, these are particularly vulnerable to financial losses through poor service charge management.