2007 Issue 5

Financial Transition from Declarant to Association
By Sam Tomasetti, CPA

There are two distinct financial phases in the early life of a condominium association.  The first is when the declarant (many people think of this as the developer) is in control.  The second is when the unit owners assume control of the affairs of the association.  The Common Interest Ownership Act is a good source of information with respect to the issues involved during these phases.  In addition, an attorney specializing in common interest communities is also a good idea to help sort out what the law really means.

In the first phase of life an association often is under the control of the declarant up until the earliest of (1) sixty days after the conveyance of sixty percent of the units to unrelated new unit owners (except in the case of master associations which have a little different rule), (2) two years after the declarant has ceased to offer units for sale, (3) two years after any right to add new units was last exercised or (4) the date the declarant voluntarily surrenders all rights to control.

During the period of declarant control it is required that at least every six months a cash basis financial statement must be provided to the unit owners.  These statements do not need to be audited by an independent certified accountant and must include all income and expenses for the calendar year to date, all accounts payable and receivable including how many days outstanding they are and which ones are to or from the declarant and affiliates, the amount of any unfunded replacement reserves and the balance of any other funds of the association.  In addition, the declarant can commit the association to contract for any needed services during this time as well.  Another of the more significant requirements is that the declarant needs to buy property and liability insurance on the common property elements no later than at the time the first unit is conveyed to an owner that is not the declarant or an affiliate.

Until the association makes a common expense assessment the declarant is responsible for paying all common expenses.  In practical terms this means that the decarant pays all the bills until the control is turned over to the association.

To mark the beginning of phase two in the early life of an association the law has some specific instructions to explain what needs to happen.  Once the change in control tests outlined above are met, the rules basically say that within thirty days after unit owners take control a number of important contracts and records need to be turned over to the association unit owners by the declarant.  Included in this list are the assets, liabilities, books and financial records, an accounting for association funds and audited financial statements prepared using generally accepted accounting principles (accrual basis fund accounting as applied to condominium associations) from the date the association received funds and ending on the date when the control was required to move from the declarant to the condominium association.  The audit is to be paid for by the declarant.

At the critical point of transition, the declarant is mandated to hire an independent certified accountant to step in and perform an audit.  In performing this work, questions are asked such as: Who should pay for each expense? Are the assets all accounted for? Were all the assets received?  These questions must be answered.  Specialized transition audit programs designed to make sure the association is not taking on any liabilities it shouldn’t and it is receiving all the assets it is entitled to from the declarant need to be drafted and executed.

Some of the techniques used in transition auditing involve sending confirmations to independent third parties to verify balances due or receivable, physical inspection of property transferred, reviewing condominium documents and by-laws, verifying unit square footage allocations, and reviewing closing documents on units sold to determine the exact date of transition for the purpose of defining who is responsible for paying which expenses.

Each early phase in the condominium development process has its clearly defined life cycle.  In the first the declarant is responsible for basically everything financial as it relates to the common areas.  In phase two of the life cycle, however, the declarant and the association need to do as much planning as possible to make the transition as smooth as possible and clearly the hiring a certified public accountant to perform an audit is the way our current legal structure attempts to help as well.

Sam Tomasetti, CPA is a principal in the accounting firm of Tomasetti, Kulas & Co., P.C.  Sam served on the CAI-CT Board of Directors as its Treasurer from 1999-2003.  He is currently Chairperson of the Publications and Marketing Committees.