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How to make sure everyone pays a fair share.
AUTHORDavid Schwartz, WilkinGuttenplan
Condominium boards that collect common charges from commercial and residential owners may be wondering whether the expenses are allocated correctly between the two groups. What's the process for figuring this out?
The process starts with reading the offering plan and the bylaws and looking at the allocation split between what's the responsibility between the commercial unit-owner and the residential unit-owner. And at the end of the year, the actual expenses come into play, and a “true-up” is done, where you actually allocate the expenses between each unit type to see if the common charges are set at the right level. And this is to see if one type of unit-owner is paying the expenses of the other type.
Where might you see a problem?
To give an example, maybe the board decided to do window washing, but only for the residential unit-owners. So the window washing takes place, and the commercial unit-owner wouldn't participate in paying a share of the expense.
If a board wants to do this, how far back can it go?
Well, bylaws are written differently, and that's more of a legal question. But I have gone back many years, if the information is available, and done an allocation split or a true-up year by year. Some boards take the position that they'll move forward from some point in time. It's more of a legal issue on going backwards – and if you can. But the calculation can be done if the information is available.
How difficult that is to true-up the expenses if your client is a mixture of residential, hotel and commercial units?
It's a matter of trying to find out who benefits from which expense. Sometimes we may have to rely on the management company. So the bigger the mixed use, the more complicated it could get.
Many boards think their commercial tenants are getting away with murder, and so they decide to do a true-up. Is there any risk the board takes in doing this?
There really are no risks. It's just making sure that the commercial unit-owners and the residential unit-owners are paying their fair share of expenses. We don't want to have the commercial owner paying for residential expenses based upon the true-up. And vice versa. At the end of the year, as part of the audit process, we'll do a true-up based upon how the allocations are read within the offering plan or the bylaws, and we'll come up with that calculation. Maybe one party is paying more into the building than they should be, and you would have to re-allocate during the budget process, saying the common charges that the commercial unit-owner paid did not cover all of the expenses during the year. And if it's legal, you can do that.
Let's say we have that investigation done, and it's clear that the money hasn't been allocated correctly. Let's say the commercial tenants need to pay more. You don’t just don't call them up and say, "You owe me $20,000." Is there a process?
We typically work with management, and we'll bring it to the attention of the legal counsels. Then legal counsel will give the advice on what the next steps are. From the accounting standpoint, we just provide the information on what the numbers look like, going backward and forward, and see what the board wants to do. At the end of the day, it's a board decision on how it wants to handle the situation, based on legal counsel’s advice.