Presenters:

1. Welcome!Washington State ChapterCOMMUNITYASSOCIATIONSINSTITUTEThe leading professional organization providingeducation, resources, and advocacyfor community association living.

2. Presenters: Sarah Anderson, CMCA, AMS • The CWD Group, Inc. Catherine (Cathy) Kuhn, CPA • Cagianut & Company, CPAs

3. Advanced Budgeting –Complex Mixed Use Associations • Overview • Budgeting • Reconciliation • Reserve Study • Manager & CPA Perspective

4. WHAT is a Mixed Use Association? • A mixed use association is a project that integrates units that serve different purposes or uses, with amenities, structures, and grounds that are jointly owned. • Examples include residential buildings with ground floor retail units, or large scale developments that are composed of residential dwellings and multiple commercial businesses.

5. WHY is Mixed Use Challenging? Do we have all day? Entity Structure: Attorneys have “fun” with this! WHAT is the Entity? • Single Condominium, with mixed use units? • Complex structure? (Master, Sub, Garage, other?)

6. WHY is Mixed Use Challenging? • Varying types of “Units” and different motives: • Residential • Commercial • Retail • Hotel • Garage

7. WHY is Mixed Use Challenging? • Different elements to “share” • Common • Limited Common • Lack of Cost Sharing Documentation • Single Condominium (between the units) • Multiple Entities (between the entities)

8. WHY is Mixed Use Challenging? • Board composition with varying entities? • Approval/transaction trail in minutes • Conflict of Interest?

9. Strategies to Make the Financial Management and Budgeting Process Less Daunting • Questioning any and all budgetary assumptions – Who owns it? Who maintains it? Who benefits from it? Who pays for it and how much do they pay? • Identifying unique association requirements included in the association’s Declaration or within the Washington Condominium Act.

10. Budgeting - Declaration • Read all governing documents– understand the entity structure (one entity vs. multiple entities) • Master Association Structure (Master/Sub/Other) Used when Commercial is Prevalent (high rise, multiple buildings - retail/hotel) • One Condo Structure (units within – Res/Commercial) -- Limited Commercial Activity

11. Budgeting - Declaration • Understand the % cost allocations (one condo) • Ask the attorney for help if it’s not clear • Attorneys (not in the industry) may not have done it correctly • Developer favorable agreements • Discuss it with the board

12. Budgeting – Declaration - Cost Sharing • Cost Sharing • Very complex area (or, can be) • Accountants likely didn’t draft the agreements

13. Budgeting – Declaration - Cost Sharing • Single Condominium (Light commercial) • Should be a cost allocation % between the units (single condo) -- Match that to the budget • Information on which costs are to be shared? • Documentation in minutes? (Composition of BOD?) • Indirect costs– how allocated? • Review the financial statements/General Ledger

14. Budgeting – Declaration - Cost Sharing • Multiple Entities: (High Rise, buildings) • Identify all costs shared between entities, line by line • Ask about written cost sharing agreements • Compare agreements to accounting records • Look for approvals in board minutes

15. Budgeting – Declaration - Master Communities • Multiple types of units within the entity? Retail/Commercial/Residential • Allocation % within Declaration? • Within residential – different types of living units? • Attached/Detached/Condominiums (“Blocks” etc) • Separate sub-budgets for each? • Neighborhoodswithin the entity? Supplemental Declarations? Special neighborhood costs – who pays?

16. Budgeting – Declaration - Master Communities Multiple types of entities outside the Master? • Sub-Residential Associations to the Master? • Commercial Associations? • Other users (i.e. users of a health club, not members of the Association)

17. Budgeting - Declaration - Master Communities • Multiple Entities– Continued • Shared costs (utilities/landscaping/amenities)? • Written Cost Sharing Agreements? • Minutes Documentation • Annual review/approval of cost sharing calculations? • Compare to accounting records

18. Budgeting – Declaration Provisions • Key provisions to review in the Declaration to establish a basis for expense distribution in the budget: • Maintenance Provisions • Special Allocation of Common Expense Provisions • Schedule of Allocated Interest or Common Interest

19. Budgeting – Declaration - Maintenance Provisions • Maintenance Responsibilities • Unit Specific • Limited Common Element Specific • Common Element Specific

20. Budgeting – Declaration - Maintenance Provisions • Identified components are maintained by: • The Association • A specific unit • A specific group of units

21. Budgeting - Declaration - Special Allocation of Common Expenses • Examples of specially allocated common expenses: • Utilities • Parking expenses • Elevators • Insurance

22. Budgeting – Declaration - Schedule of Allocated Interest or Common Interest • Defines basis for common expense allocations. Usually the percentage is a ratio of the square footage of the unit to the total square footage of all units. • Expenses associated with common elements shared amongst all entities will be distributed in the budget based off of allocated interest in the absence of any other requirement.

23. Budgeting – Condominium Act • No specific provisions relating to an element that benefits fewer than all units? • Review element definitions to verify if there is a basis for establishing a cost allocation based on benefit. • This practice is supported by the Washington Condominium Act – RCW 64.34.360(b) : “Any common expense or portion thereof benefiting fewer than all of the units must be assessed exclusively against the units benefited.”

24. Budgeting – Documenting Resolution of Expenses • Documentation of Board approved alternative expense allocations: • Approved in the Minutes • Signed Policy Resolution or Standard Operating Procedures • Recorded or signed Memorandum of Understanding • Recorded Declaration Amendment

25. Budgeting – Survey, Map and Plans • Common Elements, Limited Common Elements, Unit Specific Elements are confirmed in the Survey, Map and Plans. • Provides area specific detail in a map format. • Identifies areas that may be shared amongst fewer than all units.

26. Budgeting – Survey, Map and Plans Example

27. Questions to Challenge Assumptions during Budgeting Process • Who owns it? • Who maintains it? • Who benefits from it? • Who pays for it? • How much do they pay?

28. Budgeting- Most commonly ignored considerations • Budgets inherited from Developers • Not always realistic- Developer favorable • Missing costs • Cost sharing not clear, lack of agreements • HOA still in Build Out? Unit information clear? • HOAs -Reserves contributions (or not) from Dev? • HOAs -Cash flow deficits funded by Dev – Contribution or Loan?

29. Budgeting - Most commonly ignored considerations • Budgets inherited from other management companies: • Different methodologies/documentation • Not all agreements received • Past Board minutes -? Agreements? • See prior Developer information!

30. Budgeting - Most commonly ignored considerations • Insurance – General Liability Policies • What is included in the policies? • Is there any unit that has a measurable benefit or special benefit under the policies established? • Is there any liability covered above and beyond the areas designated as common elements?

31. Budgeting - Most commonly ignored considerations • Insurance – Property Policy • Single Property Policy • Review insurance provisions of Declaration to confirm allocation of expenses - commonly based on risk • Ask the experts

32. Budgeting- Most commonly ignored considerations • Experts • Insurance Broker • Appraiser • Provide basis for allocating premium based on Declaration requirements – risk / replacement cost • Measure any special benefits or coverages, such as value of betterments and improvements.

33. Budgeting- Most commonly ignored considerations • Utilities • Single main utility meters for services such as natural gas and water/sewer • Complex facilities may demand an independent analysis of facility consumption performed by an engineer who can analyze consumption based on use, identify sub meter installation points to apportion expenses that are not considered common, and report findings to support future utility allocations.

34. Budgeting- Most commonly ignored considerations • Other contracts: • Elevators • Landscaping • Mechanical Systems • Payroll • Parking Maintenance

35. QUESTIONS???

36. Reconciliation of Annual Expenses • The reconciliation of annual expenses is a process which compares all operating expenses for the year based on established allocations to the total revenue collected. • The reconciliation will true up or justify all expenses, and will allow the Association to determine whether the assessment revenue collected was sufficient to offset the expense liabilities for each entity.

37. Reconciliation Requirements • Reconciliations are common in large mixed use developments, and are sometimes required in simple condominium developments. • The requirement to complete an annual reconciliation will be detailed in the Declaration.

38. Reconciliation Compilation • An annual reconciliation should include: • Detail of total annual expenses matching the year end financial statement broken down by line item • Identification of basis for allocation of each line item – common expense liability or special allocation • List of any applicable adjustments to correct expenses that should have been billed to a unit directly • Summary of the total annual expenses per entity based on expense allocations compared to total annual assessment revenue paid by the entity

39. Reconciliation - Example

40. Reconciliation - Excess Income/Deficits • Accounting/Audit/Economic Considerations: • Retain 1-3 months avg expenses in operating cash, if possible • What do agreements say about retaining cash? • After that, move money to reserves, if possible

41. Reconciliation - Excess Income/Deficits • Tax Considerations: • Different entities (complex high rise or master community) • Commercial Condo- (less than 85% res) • Required to file 1120 tax return(net membership income is taxable) • Reduce income through reconciliation/refunding money to owners

42. Reconciliation - Excess Income/Deficits • Tax Considerations: • Use the “70-604” tax election to move excess income from one year to the next: • Annual membership approval • Can’t be used 2 years in a row • More info @ hoacpa.com – FAQs

43. Reconciliation - Other considerations • Re-state the financial statements if refunds were done • Make sure the financial statements tie to each other (i.e. a receivable on one entity equals a payable on the other) • Use separate Tax IDs for the Separate entities and don’t pay each other’s taxes!

44. Reconciliation - Role of Auditor in the Process • Within the same entity: • The Audit is on the financial statements as a WHOLE, not on the individual unit owners “Income Statements” • Means the CPA is not looking closely at the cost share allocation between the units • Boards do not always understand this • Audited Financial Statements not broken out by units

45. Reconciliation - Role of Auditor in the Process • Separate entities (High Rise, or Master Communities): • The CPA IS looking at the relationship between these entities

46. Reconciliation-Role of Auditor in the Process • What is the Auditor Looking For? • Do the financial statements agree?(Rec/Pay) • Footnote Disclosure • Cost Sharing Agreements • Master/Sub payments being made/accrued? • Annual reconciliations/approvals • Cost Sharing Disputes/Litigation

47. Reconciliation-Role of Auditor in the Process • The same CPA firm may audit related entities as they remain independent • Disclosure to all parties of audit relationship • The CPA cannot INTERPRET agreements– • Vague, or non-existent agreements: • Internal Control Comment • Disclaimer in the Audit Opinion

48. QUESTIONS???

49. Reserve Study – Methods of Accounting/Reporting • “FUNDS” = “Equity” = “Net Worth” • Same entity: • BEST to have separate FUNDs for the various unit owners, when possible (ideally match to RS) • Common funds versus unit-specific • Separate general ledger CASH accounts preferred • Some Associations have separate physical cash accounts

50. Requirement to Complete a Reserve Study • Master Associations commonly have between 2 – 5 total entities or units. • Per RCW 64.34.392: “ A condominium association with ten or fewer unit owners is not required to follow the requirements under RCW 64.34.380 through 64.34.390 if two-thirds of the owners agree to exempt the association from the requirements.”