By Brad Schneider, CPA / Published August 2017
In Florida, audits of community associations upon turnover from the developer entity are very different than in many other states in the U.S. Florida statutes cover in a broad sense what is to take place and, for the most part, the developer is supposed to pay for the audit versus the association.
The rules are well-defined for condominium associations in the statutes that govern condominiums and can be found in Florida Statute chapter 718 and in the Florida Administrative Code 61B-22.0062. For HOAs, rules are stated in chapter 720, and rules covering cooperatives are found in chapter 719.
Each condominium is required to have an audit performed which is paid for by the developer, covering the period of the date of incorporation until the date of turnover to the owners of the units. The developer has the option to shorten the period of audit by having audits done during their tenure, before the owners obtain control of the association. However, for continuity purposes, the developer may decide to have a comprehensive audit performed for the entire period under their control.
The condominium begins at the point that the first unit is sold. Initially the developer can write in the declaration to forgo assessments [on units which they own] by providing a developer guarantee. The guarantee provides that during the initial period mentioned in the Declaration, (up to three months, and it can be extended as stated in the document), the developer, in lieu of paying assessments, is responsible for paying any excess common expenses incurred which exceed regular periodic assessments against the other unit owners in the same condominium. Assessments must be guaranteed not to exceed a stated dollar amount during that time by the developer.
Based on this language, it can be inferred that the expenses are on the accrual basis because of the word incurred. This means, if the developer has incurred expenses, they cannot disregard them if they have not yet been paid at the end of the guarantee period. Also, if there are delinquent unit owners, it can be construed that their assessed amounts are taken into account even if they are not yet paid.
The turnover audit report for a condominium must include the following:
1. Audited financial statements must be prepared by an independent certified public accounting firm in accordance with generally accepted auditing standards as prescribed by the Florida Board of Accountancy.
2. The financial statements must be prepared in accordance with generally accepted accounting principles.
3. The financials need to present the income and expenses separately for each fiscal year and interim period until the turnover date. (The presentation can be included in the notes, the supplementary information, or the main body of the financial statements.)
4. A statement should be prepared providing total cash paid by the developer to the association (assessments as well as guaranteed payments).
5. Any common expenses paid by the developer on behalf of the association that were not included in the books of the association need to be identified separately, including the amount and purpose of each expenditure.
6. For developer guarantee periods, the following should be included:
A. The period of time covered by the guarantee
B. Total amount of common expenses
C. Total amount of assessments charged to the non-developer owned units during the guarantee period
D. All non-assessment income earned by the association during that period
E. The amount of expenses incurred and related to each non-assessment revenue grouped by each non-assessment revenue
F. Total developer payments during or for the guarantee period
G. The amount owed by the developer or the amount due from the developer for the guarantee period.
Everything above was written for the normal situation, where the developer builds the condominium complex and sells the units. In Florida, we all are familiar with the crash of the real estate market. There were many developers who went out of business, went through bankruptcy, were foreclosed upon, or abandoned or deserted their responsibilities, and other entities stepped into their shoes. Many of these deals are complex, and legal advice is recommended to see if the requirements mentioned above apply to the new entity that is now turning over the units to the homeowners.
In a homeowner association, the standard or normal way to turn over the association to the homeowners is within three months of the date that 90 percent of the homes have been sold. However, again there have been many complicating factors to the turnover of homeowners association. Bankruptcy, foreclosure, receivership, and the process of another entity taking over for the developer have caused complications that usually will involve the attorney for the association to be in direct communication with the auditor.
Upon turnover, there are similar rules for the need of audited statements from the developer to be turned over to the unit owners. That is assuming that the entity was incorporated after December 31, 2007. If incorporated before that date, the rules relating to the developer turning over audited financial statements from incorporation until the turnover date do not apply. So, what does apply? This, like many issues with homeowners association turnovers, especially when there are complicating issues as mentioned above, will require both sides to seek a legal opinion. If limiting the legal fees is one of the goals, then getting the opinion for both sides together may be a benefit to the developer entity and the homeowners.
Similar requirements for audited financial statements are in place for cooperatives under Chapter 719 of the statutes.
The auditor will perform the normal audit procedures and prepare the financials in accordance with generally accepted accounting principles, but what else will be at issue compared to the normal association audit? Below is a list of some these issues:
1. The auditor will need to determine if all the assessments, guaranteed payments, and other items were paid by the developer entity.
2. Were the reserve transfers made according to the developer budget?
3. Were any construction costs included in the association expenses? Some examples are as follows:
A. Electricity costs going down as unit owners take possession of units. (There could be electricity costs from the construction that were paid by the association.)
B. Water bills going down as owners take possession.
C. Landscaping and road construction bills which were really part of the development costs.
D. Cable rebates or cell tower rental income given to the developer entity instead of the association.
E. Initial expenses…to see if they were before the association came into existence.
F. Start-up expenses—whose responsibility, developer or the association.
Based on the statutes, the developer must pay for the audit. If you are in an association after the turnover, the audit is paid for by the association, and the association is the client of the audit firm. The auditor reports to the board of directors. They will communicate with the management company, but the allegiance should be to the association. It is very important that the audit firm be independent; however, when there is a gray area on whose responsibility is an expense or who is entitled to income, the audit firm will be most likely discuss it with the developer.
My point is that if the statutes were changed to make the audit client the new board and require the developer to reimburse the association, the auditor would have less pressure and would be looking out for the unit owners’ best interests and not the developer’s.
There are many requirements beyond the financial requirements in a developer turnover. It is highly recommended that the developer and/or the association work with an attorney and an accounting firm that have experience in these matters.
Brad Schneider, CPA
President and Founder of CondoCPA Inc.
Brad Schneider, CPA, is the president and founder of CondoCPA Inc., a CPA firm that specializes in community associations. Schneider is a CPA licensed in Florida, Illinois, and California; is a certified fraud examiner; and has an MBA in finance and marketing. He has been working with community associations for more than 30 years. The firm has offices in Sarasota, Tampa, and Orlando as well as Chicago and Felton, California. CondoCPA is a founding member of the Alliance of Community Association CPAs (cacpasalliance.com). For more information, call (877) 900-1040 or visit condocpa.com.