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Washington State Chapter
COMMUNITY
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for community association living.
Presenters:
Sarah Anderson, CMCA, AMS
The CWD Group, Inc.
Catherine (Cathy) Kuhn, CPA
Cagianut & Company, CPAs
Advanced Budgeting –
Complex Mixed Use Associations
Overview
Budgeting
Reconciliation
Reserve Study
 Manager & CPA Perspective
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.
WHY is Mixed Use Challenging?
Do we have all day?
Entity Structure:
Attorneys have “fun” with this!
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WHAT is the Entity?
Single Condominium, with mixed use
units?
Complex structure? (Master, Sub,
Garage, other?)
WHY is Mixed Use Challenging?
• Varying types of “Units” and different motives:
 Residential
 Commercial
 Retail
 Hotel
 Garage
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)
WHY is Mixed Use Challenging?
• Board composition with varying entities?
 Approval/transaction trail in minutes
 Conflict of Interest?
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.
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
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
Budgeting – Declaration - Cost
Sharing
• Cost Sharing
 Very complex area (or, can be)
 Accountants likely didn’t draft the agreements
Budgeting – Declaration - Cost
Sharing
Single Condominium (Light commercial)
o Should be a cost allocation % between the units
(single condo) -- Match that to the budget
o Information on which costs are to be shared?
o Documentation in minutes? (Composition of
BOD?)
o Indirect costs– how allocated?
o Review the financial statements/General Ledger
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
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?
 Neighborhoods within the entity? Supplemental
Declarations? Special neighborhood costs – who
pays?
Budgeting – Declaration - Master
Communities
Multiple types of entities outside the Master?
o Sub-Residential Associations to the Master?
o Commercial Associations?
o Other users (i.e. users of a health club, not
members of the Association)
Budgeting - Declaration - Master
Communities
Multiple Entities– Continued
o Shared costs (utilities/landscaping/amenities)?
o Written Cost Sharing Agreements?
o Minutes Documentation
o Annual review/approval of cost sharing
calculations?
o Compare to accounting records
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
Budgeting – Declaration Maintenance Provisions
• Maintenance Responsibilities
 Unit Specific
 Limited Common Element Specific
 Common Element Specific
Budgeting – Declaration Maintenance Provisions
• Identified components are maintained by:

The Association

A specific unit

A specific group of units
Budgeting - Declaration - Special
Allocation of Common Expenses
• Examples of specially allocated common
expenses:
Utilities
Parking expenses
Elevators
Insurance
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.
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.”
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
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.
Budgeting – Survey, Map and
Plans Example
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?
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?
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!
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?
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
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.
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.
Budgeting- Most commonly
ignored considerations
• Other contracts:
 Elevators
 Landscaping
 Mechanical Systems
 Payroll
 Parking Maintenance
QUESTIONS???
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.
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.
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
Reconciliation - Example
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
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
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
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!
Reconciliation - Role of Auditor in
the Process
• Within the same entity:
o The Audit is on the financial statements as a
WHOLE, not on the individual unit owners
“Income Statements”
o Means the CPA is not looking closely at the cost
share allocation between the units
o Boards do not always understand this
o Audited Financial Statements not broken out by
units
Reconciliation - Role of Auditor in
the Process
• Separate entities (High Rise, or Master
Communities):
 The CPA IS looking at the relationship
between these entities
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
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
QUESTIONS???
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
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.”
Requirement to Complete a
Reserve Study
• This election provides the Association with a
method to forego the expense, as the other
entities independently contract for the study
as an addendum to their unit specific study,
or commit to producing funds as needed by
means of a special assessment.
Reserve Funding
• Unless specifically detailed in the Declaration,
there is no requirement for the Master
Association to maintain a common reserve
fund.
• In many instances commercial entities will
prefer relying on a special assessment, and
manage their replacement exposures through
their own independent investments.
Reserve Funding
• In the absence of a common reserve fund,
expenses are either:
Specially assessed against the units at the time
replacement is required; or
Forecasted within the operating budget
Reserve Study – Methods of
Accounting/Reporting
• Reserve Study is required “Supplementary
Information” in the Audit Report
• Will show separate components (units vs.
common) IF the RS breaks that out
• If the Reserve Study is omitted, the Audit
Report and Disclosures state that
Reserve Study – Methods of
Accounting/Reporting
• The CASH and FUNDS are typically grouped
into ONE balance on the Balance Sheet
IF the separation of the CASH and FUNDS
(between units) is Disclosed, the Auditor cannot
attest to the correctness of the individual balances
QUESTIONS???
Thank you!
• Sarah Anderson, CMCA, AMS
CWD Group
sarah@cwdgroup.com
www.cwdgroup.com
Catherine (Cathy) Kuhn, CPA
Cagianut & Company, CPAs
cathy@hoacpa.com
www.hoacpa.com (PowerPoint and FAQs)
CAI and the
Washington State Chapter of CAI
Working Together to Serve You
Locally and Nationally
www.WSCAI.org
425-778-6378
www.CAIONLINE.ORG
1-888-224-4321