Lisa Prevost in Legal/Financial on May 24, 2019
In an earlier post, we laid out the two of the six key elements of the audited financial statement that co-op and condo boards have to be able to explain at the annual meeting. Today we lay out the third and fourth elements:
RESERVES. Board members should always check to make sure that any assessments they collected for the reserve fund actually ended up there, says the accountant Stephen Beer, a partner at Czarnowski & Beer. “I see this all the time,” he says. “The managing agents are busy, they have a lot going on, so the money doesn’t get moved over from the operating account. If it’s something that the board intended, they need to make sure it’s correct on the financial statement.”
This is also a good time to consider the adequacy of the reserve fund. If it’s deemed too low, what is the plan to replenish it? Beer’s firm recommends minimum reserve funds of $2,000 per unit, or a minimum of $100,000 in total.
But analyzing the adequacy of the reserve fund is an inexact science unless the board has sought a professional assessment of the condition of the building and its systems. “You really should have some sort of study to determine costs for at least the next five years,” says Michael Esposito, an accountant at WilkinGuttenplan. “And you should update it annually.”
In condominiums that rely on their unit-owners having access to Fannie Mae mortgage financing, boards should make sure that 10 percent of yearly common charges are being set aside for reserves, Beer advises. That’s a Fannie Mae underwriting requirement for condominiums, unless they have undertaken an official reserve study of estimated capital costs over the next 30 years.
SECURITY DEPOSITS. Alteration or security deposits paid by shareholders or unit-owners doing renovations to their apartments may also be noted in a liability line item on the balance sheet. Sometimes, instead of being returned to owners after renovation work is completed (assuming no damage was done by the contractors), that deposit money is allowed to sit there and never gets cleaned up, Beer says.
“I don’t understand why people don’t ask for their money back, but these things just accumulate,” he says. This is not a good practice, however, because at some point, the funds could be subject to seizure by the state as abandoned property. "Ask the property manager: ‘How much are they holding, and why?’ ” Beer says. “It’s a helpful exercise.”
Coming Monday, keys five and six: Accounts Payable and Commercial Rent.
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