Cooperative and condominium boards can range from having a fully functioning team to a single volunteer board member seemingly doing everything themself. The spectrum of board member involvement can also range from understanding the details of this unique industry, which includes reading industry publications and attending seminars (more recently webinars), to those who simply rubber stamp the work of trusted professionals.
While you may have an idea of where your board falls in that range, have you assessed the position of professionals who assist the board, like your property manager or accounting firm?
Many accountants practice in the area of cooperatives and condominiums, but there aren’t many who offer a broad range of industry experience they can readily share with their clients.
As Czarnowski & Beer, we often work with fully involved board members who want to understand all aspects of their volunteer position. Our clients often report that they find our expertise helpful and seek it out regularly.
We offer cooperative and condominium boards helpful tools and resources in the form of guides, checklists, blogs, and video presentations. This does require an investment on our part both in the creation of those items but also in conversation time with our clients. Our firm’s culture is to encourage that communication.
In this short guide, we will review areas of the financial statement we believe boards should pay extra attention to. With the threat of a recession and increasing inflation looming over us, there could be an effect on future operations costs and decisions that board members will want to quickly identify.
The most significant issues to consider in 2022 are new or higher operating costs in, staffing issues and the effect on future revenue, and unit owners (including commercial leases) ability to pay their monthly charges.
Standards vary between cooperative and condominium, but some aspects ring true for them both. If money has been designated for a specific use, it must be reflected as restricted.
With the volume of tasks a managing agent has, funds can be transferred from a different bank account than what is reflected on the financial statement, this happens in cases such as when assessment funds remaining in the operating account are not transferred to a designated bank account.
If you identify fund allocation issues on the annual financial statement, the board should address them as quickly as possible to ensure that unit owner income tax benefits are not jeopardized.
Cooperative boards will also want to ensure funds for capital work are not left in operating expenses, which minimizes the best possible operating results while jeopardizing deductions for future income tax purposes. Any assessments to fund such work should be recorded as revenue in the same period as the offsetting work is completed, thus the timing of the unit owner payments may not properly match when the period within which the assessment is recorded as revenue.
An audit issue for a reasonable amount of arrears from the commercial as well as residential tenants will affect both cooperatives and condominiums. Segregating the portion of accounts payable between operating expenses (paid by the checking account) and capital work paid for from reserves or restricted cash is quite important for all entities. Assessments for non-operating items should display that they do not impact monthly operations.
As the portion of the monthly maintenance to pay for loan amortization is in the monthly budget, which also does not qualify as an expense, it can create a false sense of a surplus. This can create questions in shareholders’ minds as to whether a monthly charge increase is needed but paying attention to disclosing the situation and the net profit after considering that the use of the maintenance for that purpose is an important issue for cooperatives.
As a condominium does not own the property, which the unit owners in common own, then any capital work is being paid for by the Association as an agent so it should not be included in operating expenses. Segregating out the capital assessments from operating revenue should occur as well.
The board needs to be involved in planning, the accumulation phase, and approving the outside auditors’ audit to achieve the best possible financial statement. Communication is key and as mentioned earlier, we encourage that process.
The items listed above are some of the general aspects that you should focus on, and we forewarn there are others that may be unique to your situation. Taking the time to coordinate, question, and review the financial statement allows for the best possible annual financial picture. For more insight, take a look at our Understanding Financial Statements playlist on Youtube.
With over 35 years of experience serving co-ops and condos, the C&B team can outline specific steps you should take to minimize taxes, maximize loan eligibility, and enhance the value of your property. For more information, contact us at firstname.lastname@example.org or (212) 397-2970.