Year End Surplus Treatment in Board’s Hands

Nov 7, 2017 | Associations, Budget, Community, Meetings, Payments

Q:        What must be done with a condominium association’s operating surplus at the end of the year? Is it true that it must be returned to the owners in the form of payment or a credit to next year’s budget or assessment? (J.S. via e-mail)

A:        Condominium associations levy assessments against the unit owners for their individual share of funds required to pay for “common expenses.” When all of the receipts or revenues, including assessments, rents, or profits collected by an association exceed the common expenses, this is referred to as the “common surplus.”

The Florida Condominium Act generally provides that funds for the payment of common expenses are allocated in the percentages set forth in the declaration of condominium. For condominiums created after January 1, 1996, the Act provides that each unit will have identical shares for sharing common expenses and owning common surplus.

However, the statute does not state what associations must do with the common surplus (including year-end operating surplus), nor does it require associations to refund surplus operating funds to the owners (and few, if any, associations do so). In my opinion, the proper treatment of the surplus operating funds is to accrue them as revenue for the next fiscal year, and apply the revenue to offset expense items contained in the budget. This does not necessarily mean that the money has to be spent, as a reasonable accumulation of working capital is a proper budget line item.

Although only applicable in somewhat limited tax reporting situations, there is an IRS Revenue Ruling that requires a vote of the owners to authorize the “rollover” of surplus funds to avoid taxation of excess operating income. An appropriate accounting professional should determine if a particular association is subject to the IRS Revenue Ruling (most aren’t), and assist with the manner in which the “rolled over” funds are accounted for in such situations.

Q:        How are “voting interests” defined? (J.R. via e-mail)

A:        Voting interests are the voting rights distributed to the association members, which are described in the governing documents of the association.

Most frequently, each assessable unit or parcel is assigned one voting interest, no matter how many people actually own the property (sometimes called “one door – one vote”). Occasionally, particularly in older condominiums where the sharing of assessments is weighted based on unit size, the voting interests may also be weighted.

Q:        At a recent meeting of my condominium association’s board, there was discussion about voting down an audit. Is this allowed?  (O.A. via e-mail)

A:        Condominium associations with revenue in excess of $500,000 are required to prepare an annual audit. Associations with revenues between $300,000 but less than $500,000 must prepare reviewed financial statements annually. Associations with more than $150,000, but less than $300,000, in revenue must prepare an annual compiled financial statement. Associations with less than $150,000 in revenue are only required to prepare a report of cash receipts and disbursements. Owners can vote to “waive” these requirements by majority approval.

Effective July 1, 2017, the legislature made a few of changes to this law. There is now no limitation on the number of times an association may waive the statutory financial reporting requirements (it used to be limited to three consecutive years). The statute also removed the exemption for associations with less than 50 units. Now, the statutory financial reporting requirement applies regardless of the size of the community, and solely based on revenue. Although found in different statutes, these rules apply to both condominium and homeowners’ associations.

 

Written by Joe Adams and originally posted on FL Condo HOA Law Blog