Magazine article Journal of Property Management

Accounting Guidelines for Community Associations

Magazine article Journal of Property Management

Accounting Guidelines for Community Associations

Article excerpt

Accounting Guidelines for Community Associations

Common interest realty associations (CIRAs) are a rapidly growing segment of the U.S. housing market. They include condominiums, timeshare developments, planned unit developments (PUDs), and cooperative housing corporations.

It is estimated that there are currently more than 130,000 associations nationwide, representing at least 50 percent of the market share of new home sales in the 50 largest metropolitan areas. These associations spend over $12.5 billion and maintain another $5 billion in reserves - a buying power greater than the total annual budget for the State of Illinois. Given current population trends and considering the economics of home buying, it is estimated that by the year 2000, there will be over 225,000 associations and in excess of 18.5 million units (CAI, 1988).

CIRAs and financial information

The responsibilities of owning a collective property are much different from those of owning a house. Each unit owner has a shared responsibility for maintaining the property held in common with his or her neighbors. A key feature of this common ownership arrangement is the existence of an association of owners which is responsible for providing services and maintaining property that all the owners share or own in common.

Associations have governing documents (Covenants, Conditions, and Restrictions, or CC&Rs) that typically state the owners' rights and restrictions on the use of common property, as well as their obligations to participate in the governing and funding of the association.

Complying with the CC&Rs and maintaining the common property requires a substantial investment of time and money. Generally, the association members elect a board of directors to act as a responsible party on behalf of the association. In many associations, the board of directors delegates the day-to-day management function to a property management company.

The management company's responsibility is to maintain the association's common property in accordance with the wishes of the board of directors. In most instances, the management company is entrusted with collecting homeowner assessments and paying bills. In smaller associations, the management company may only perform the bookkeeping function. However, in larger associations the management company also may be actively involved in engaging repair and maintenance persons, answering members' complaints, and enforcing association rules through the imposition of fines.

Because of the large number of people and the significant amounts of money involved, CIRAs have special accounting and auditing needs. The primary users of association financial information are individual owners. They are interested in information that indicates that assessments are being expended for the common good of the association. They want to know whether the assessments are adequate to cover current operating expenses and if there is a need to raise the assessments or impose a special assessment for future repairs and replacements.

Financial information that indicates that the association is fiscally sound may help owners sell their units and enhance the value of individual units. Financial information also helps members judge whether the management company is adequately performing its contractual obligations and whether the association's board of directors is complying with CC&Rs and acting for the common good of the membership.

However, interest in the financial statements is not limited to association members. Financial information is often requested by third parties, such as:

* the lender to the developer who holds the financing on the property during the development period;

* lenders to buyers of units;

* prospective buyers of units;

* federal, state, and local tax authorities; and

* insurance companies used by the CIRA or individual members. …

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