Common Interest Realty Associations

By Daniels, Roger B.; Spade, Thomas M. | The CPA Journal, June 2010 | Go to article overview

Common Interest Realty Associations


Daniels, Roger B., Spade, Thomas M., The CPA Journal


Special Accounting and Financial Reporting Considerations

Accounting and financial reporting for common interest realty associations (CIRA) requires understanding of their unique nature. CIRAs are required to report their results in ways that many other types of entities do not; these include special exceptions to general rules as well as extra reporting requirements. Contributing to the complexity are widely varying individual state laws, highly specialized and often unfamiliar accounting principles, and the special type of financial statement end users. These organizations are increasingly requesting the expertise of CPAs to provide attestation and nonattestation services and serve as members of their governing boards.

A CIRA is a legal entity designed to provide services and ensure continuity in a neighborhood. There are three main types of CIRAs: homeowners associations (HOA), condominiums, and cooperatives. (The nature of cooperatives is outside the scope of this discussion: They are organized as corporations whereby the shareholder-tenant enters into a lease with the cooperative, and the shares permit the tenant to occupy the residence under the lease agreement. Unlike HOAs and condominiums, residents of cooperatives do not have an ownership interest in their physical residence per se. They occupy their respective units through negation of either a proprietary lease or occupancy agreement, depending upon whether the building is obtained through governmentbacked financing.)

Characteristics of CIRAs

Each type of CIRA has three general similarities: Membership in the association is mandatory and automatic for all owners, governing documents create a binding relationship between each owner and the association, and mandatory assessments are charged to each owner to fund the operation of the association and maintenance of the common properties. The major difference between an HOA and a condominium is land ownership. In an HOA, a member owns his house and its lot, while the common property (such as commonly owned land, community buildings, improvements, and recreational facilities) is owned by the entity.

In a condominium arrangement, the member owns the interior space of the unit and possesses an undivided portion of common areas. These include the common property (as listed above), the land under the buildings, exteriors and common walls, roofs, plumbing and electrical components, and underground utilities. An accepted approach to calculating this portion is to divide the square footage of the member's unit by the square footage of all units in the association.

Know the Governing Documents

Governing documents are generally prepared by the builder-sponsor when the community association is established. They describe the responsibilities of the board of directors, the maintenance responsibilities of the association, and the responsibilities of the owners. Generally, governing documents are, in order of precedence: the declaration of covenants, conditions and restrictions, articles of incorporation, bylaws, and any board-approved governance policies or procedures. For example, if a bylaw is in conflict with a board resolution, then the bylaw takes precedence. If a bylaw is in conflict with the declaration, then the declaration takes precedence. (This hierarchy may vary slightly according to state statutes and should be verified through legal counsel.)

All types of CIRAs are required to maintain the common areas. Most set aside a portion of their assessments to fund future major repairs and replacements. Many states require that associations prepare and distribute financial information, including a plan for funding future replacement of major components. As a matter of good practice, associations generally maintain a separate fund for major repairs, replacements, and capital improvements. If an association has a need for funds in excess of the amounts set aside for future major repairs and replacements (for example, the roofs on all the buildings in a condominium complex are in need of replacement, and there is not enough in the reserve fund to cover the cost), they may levy a special assessment. …

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