HOA Accounting Question

DavidG45 (Delaware)
Posts: 994

Posted:

Our community has a single HOA, but we have about two hundred lots that are age-restricted (ie: 55+). We have a big clubhouse and pool for the entire community's use. We have a smaller clubhouse and pool that is only for the use of people in the age restricted lots.

We all pay an $85 general assessment fee, but the age-restricted residents pay an addition $20 assessment that is used to pay for their clubhouse and pool.

In a former life I assisted county and city government with fund accounting software, and my expectation would be that the $20 assessment would have its own general ledger and its own bank account. But our property manager - who does our books - dumps the $20 into the same bank account as the $85. We have a single general ledger, and the budget does show the $20 as a separate line item, and the age-restricted amenity expenses are summed together to an ammount that matches the budgeted income. However, this still does not seem right to me.

One major prolem is that this year we will probably collect at least $20k more in age-restricted assessments than our age-restricdted expenses; but that money is going into the general fund. This seems to me to be, at best, poor accounting practice. At worst, it would seem possibly illegal.

Am I wrong about this? Can some accounting experts shed some light for me?

TIA

HenryS6 (Arizona)
Posts: 111

Posted:

I don't believe that there are different colors of money for HOA funds, so comingling them is fine.

If you are collecting more in dues that you need, you can always reduce assessments.

DavidG45 (Delaware)
Posts: 994

Posted:

Well, not a dime from that $20 can be spent on anything other than the age-restricted amenities. If it does, that means the age-restricted folks will be paying more for the common elements than anyone else. So how can we be assured the money is NOT spent for anything outside of its proper use if it is not in a separate account, and in its own general ledger?

PatJ1 (North Carolina)
Posts: 568

Posted:

Your Chart of Accounts for the HOA can contain sub-accounts within the general ledger to record the assessment income and expenses for the age-restricted amenities.

Are any of your operating funds being used to maintain the age-restricted amenities? Or is the separate clubhouse completely self-funded by the additional $20 assessment? Expenses and future capital needs?

HenryS6 (Arizona)
Posts: 111

Posted:

Quote:

Posted By DavidG45 on 09/20/2021 6:38 AM
Well, not a dime from that $20 can be spent on anything other than the age-restricted amenities. If it does, that means the age-restricted folks will be paying more for the common elements than anyone else. So how can we be assured the money is NOT spent for anything outside of its proper use if it is not in a separate account, and in its own general ledger?

Like I said, you are used to dealing with colors of money. HOAs don't have colors of money.There is no law that says money collected from the age restricted folks has to be spent on age restricted amenities.

DavidG45 (Delaware)
Posts: 994

Posted:

Quote:

Posted By PatJ1 on 09/20/2021 6:45 AM
Your Chart of Accounts for the HOA can contain sub-accounts within the general ledger to record the assessment income and expenses for the age-restricted amenities.

Are any of your operating funds being used to maintain the age-restricted amenities? Or is the separate clubhouse completely self-funded by the additional $20 assessment? Expenses and future capital needs?

The separate clubhouse is entirely self-funded. Not one dollar of the $20 assessment can be spent elsewhere (per our governing documents) and not one dollar of the $85 general assessment can be spent on the age-restricted clubhouse. Note part of the $20 is put into its own Reserve Fund.

The problem now is that, with the way our books read, when we have a surplus in that assessment at the end of the year, that money will just go into our checking account, comingled with the other money, and our Budget will start back at zero. Essentially, those in the Age Restricted lots will have donated money into the general fund. That can't possibly be right, can it?

DavidG45 (Delaware)
Posts: 994

Posted:

Quote:

Posted By HenryS6 on 09/20/2021 6:46 AM

Posted By DavidG45 on 09/20/2021 6:38 AM
Well, not a dime from that $20 can be spent on anything other than the age-restricted amenities. If it does, that means the age-restricted folks will be paying more for the common elements than anyone else. So how can we be assured the money is NOT spent for anything outside of its proper use if it is not in a separate account, and in its own general ledger?

Like I said, you are used to dealing with colors of money. HOAs don't have colors of money.There is no law that says money collected from the age restricted folks has to be spent on age restricted amenities.

I should draw you attention back to my request for advice from accounting experts.

HenryS6 (Arizona)
Posts: 111

Posted:

Quote:

Posted By DavidG45 on 09/20/2021 6:51 AM

Posted By PatJ1 on 09/20/2021 6:45 AM
Your Chart of Accounts for the HOA can contain sub-accounts within the general ledger to record the assessment income and expenses for the age-restricted amenities.

Are any of your operating funds being used to maintain the age-restricted amenities? Or is the separate clubhouse completely self-funded by the additional $20 assessment? Expenses and future capital needs?

The separate clubhouse is entirely self-funded. Not one dollar of the $20 assessment can be spent elsewhere (per our governing documents) and not one dollar of the $85 general assessment can be spent on the age-restricted clubhouse. Note part of the $20 is put into its own Reserve Fund.

The problem now is that, with the way our books read, when we have a surplus in that assessment at the end of the year, that money will just go into our checking account, comingled with the other money, and our Budget will start back at zero. Essentially, those in the Age Restricted lots will have donated money into the general fund. That can't possibly be right, can it?

Can you please post the portion of the CC&Rs that state that the special $20 assessment can only be spent on the age restricted things and the general assessment cannot be spend on the age restricted clubhouse?

PatJ1 (North Carolina)
Posts: 568

Posted:

All the accounting is handled in the HOA general ledger and the entries need to be done correctly. It is complicated and most MC's, if you're using one, lump things together. Ours always shows our our Reserve Account Expenses in our Operating Budget and we have to adjust it to see where we are.

One HOA, 1 general ledger, 1 1120 tax filing. Proper set up of the Chart of Accounts lets you know where everyone is.

DavidG45 (Delaware)
Posts: 994

Posted:

Quote:

Posted By HenryS6 on 09/20/2021 6:56 AM

Posted By DavidG45 on 09/20/2021 6:51 AM

Posted By PatJ1 on 09/20/2021 6:45 AM
Your Chart of Accounts for the HOA can contain sub-accounts within the general ledger to record the assessment income and expenses for the age-restricted amenities.

Are any of your operating funds being used to maintain the age-restricted amenities? Or is the separate clubhouse completely self-funded by the additional $20 assessment? Expenses and future capital needs?

The separate clubhouse is entirely self-funded. Not one dollar of the $20 assessment can be spent elsewhere (per our governing documents) and not one dollar of the $85 general assessment can be spent on the age-restricted clubhouse. Note part of the $20 is put into its own Reserve Fund.

The problem now is that, with the way our books read, when we have a surplus in that assessment at the end of the year, that money will just go into our checking account, comingled with the other money, and our Budget will start back at zero. Essentially, those in the Age Restricted lots will have donated money into the general fund. That can't possibly be right, can it?

Can you please post the portion of the CC&Rs that state that the special $20 assessment can only be spent on the age restricted things and the general assessment cannot be spend on the age restricted clubhouse?

"In addition to the annual assessments, after completion of the Limited Common Elements assessments must be made at least annually, to pay the Common Expenses of the Corporation related to the Limited Common Elements..."

AugustinD
Posts: 3,698

Posted:

-- The sub-association and the master association are all under the legal umbrella of a single corporation, correct? In which case a proper Chart of Accounts covers your concerns, as PatJ1 observed.

-- Observation: Many authorities do not like the commingling of reserve funds with operating funds in the same bank account. Other authorities say it's fine to do such commingling. I think a review of your state's HOA statute on this subject is appropriate at this time, so decision-making is informed.

-- One reason HOAs often put reserve funds into one bank account and operating funds into another is because of FDIC (insurance) limits.

Quote:

Posted By DavidG45 on 09/20/2021 6:51 AM

The problem now is that, with the way our books read, when we have a surplus in that assessment at the end of the year, that money will just go into our checking account, comingled with the other money, and our Budget will start back at zero. Essentially, those in the Age Restricted lots will have donated money into the general fund. That can't possibly be right, can it?

-- Where any surplus for the year goes depends on the covenants and state law. Some state statutes or covenants might require that it be refunded to owners. Some state statutes and covenants may be silent. Some boards may have the discretionary power to put the surplus into the reserve funds.

-- Respectfully I do not think you have quite nailed the section of the covenants that addresses exactly how assessments are to be made, and so funding is to be achieved, for the age-restricted community's assets and the non-age restricted community's assets. Common sense says what you suggest above. But I am so far not satisfied with what you quoted.

AugustinD
Posts: 3,698

Posted:

From the Delaware Uniform Common Interest Ownership Act (UCIOA):

§ 81-314. Surplus funds.
Unless otherwise provided in the declaration, any surplus funds of the association remaining after payment of or provision for common expenses and any prepayment of reserves must be paid annually to the unit owners in proportion to their common expense liabilities or credited to them to reduce their future common expense assessments.

SheliaH (Indiana)
Posts: 6,964

Posted:

I don't see anything illegal about it either. If the people in the 55+ area opt to use the big community clubhouse instead of the one designed only for their use, they're adding more wear and tear on that clubhouse and pool because the rest of the community is also using it. All the money is going to be used to pay for repairs and maintenance for both clubhouses and pools anyway, so I think this is fair.

If it is not right do not do it; if it is not true do not say it. Marcus Aurelius

DavidG45 (Delaware)
Posts: 994

Posted:

The 55+ pays the same $85 that everyone else pays; which pays for the wear and tear of the main clubhouse and pool.

However, the 55+ pays an additional $20 (for a total of $105) for the age restricted clubhouse and pool. If, say, the expenses of the age restricted clubhouse only come to $19 at the end of the year, and the additional $1 is placed in the general assessment pot; then the 55+ residents would effectively have paid $86 in their general assessment; $1 more than the other residents.

If it could work that way, the remaining residents could vote for the 55+ assessment to be $100/month, and the general assessment to be $10/month, then just pluck money from the $100 (only paid by 55+ residents) to pay for everything else.

CathyA3 (Ohio)
Posts: 6,299

Posted:

Probably not illegal to co-mingle, but it's definitely not illegal to separate them so that's what I would do. It's not that much more work, and it will make it easier to answer questions if someone complains.

For honks and giggles, how do you handle your reserve studies? Are both sets of amenities lumped together, or are they separated? If the 55+ fee is meant to entirely pay for their separate facility, that also would argue for keeping separate books.

DavidG45 (Delaware)
Posts: 994

Posted:

Quote:

Posted By AugustinD on 09/20/2021 7:47 AM
From the Delaware Uniform Common Interest Ownership Act (UCIOA):

§ 81-314. Surplus funds.
Unless otherwise provided in the declaration, any surplus funds of the association remaining after payment of or provision for common expenses and any prepayment of reserves must be paid annually to the unit owners in proportion to their common expense liabilities or credited to them to reduce their future common expense assessments.

That is an interesting sidenote, thanks. I assume there is an exception while under Declarant control, because we have nearly $200,000 in our bank account right now, from four years of budget surpluses.

AugustinD
Posts: 3,698

Posted:

Quote:

Posted By DavidG45 on 09/20/2021 8:01 AM
However, the 55+ pays an additional $20 (for a total of $105) for the age restricted clubhouse and pool. If, say, the expenses of the age restricted clubhouse only come to $19 at the end of the year, and the additional $1 is placed in the general assessment pot; [snip]

If your Declaration (1) is silent about surpluses; but (2) states that funding for the two categories of assessments is to be segregated (at a minimum and practically speaking, in a chart of accounts), then that $1 has to be returned to those owners in the age restricted part of the HOA.

Quote:

Posted By DavidG45 on 09/20/2021 8:01 AM
If it could work that way, the remaining residents could vote for the 55+ assessment to be $100/month, and the general assessment to be $10/month, then just pluck money from the $100 (only paid by 55+ residents) to pay for everything else.

For the greater part by far, the Board, not the owners, sets assessments, pursuant to the covenants and statute.

I think you ought to post the pages of your covenants here that address "assessments."

AugustinD
Posts: 3,698

Posted:

Quote:

Posted By DavidG45 on 09/20/2021 8:02 AM

Posted By AugustinD on 09/20/2021 7:47 AM
From the Delaware Uniform Common Interest Ownership Act (UCIOA):

§ 81-314. Surplus funds.
Unless otherwise provided in the declaration, any surplus funds of the association remaining after payment of or provision for common expenses and any prepayment of reserves must be paid annually to the unit owners in proportion to their common expense liabilities or credited to them to reduce their future common expense assessments.

That is an interesting sidenote, thanks. I assume there is an exception while under Declarant control, because we have nearly $200,000 in our bank account right now, from four years of budget surpluses.

-- I see no such exception in the Delaware UCIOA. Your Declaration might give the Declarant more powers regarding surplus funds, though. It's possible there is a lot of legal wiggle room on the point, especially if not all the lots are sold and developed, or not all the common area has been developed yet per the promises in the covenants. I keep in mind a Declarant is somehow segregating the costs of development from the more mundane costs of running the HOA for the direct benefit of present owners.

-- Has a reserve study been done?

-- I want to double check: Are there any condominiums within this master association? The Del UCIOA requires condos and cooperatives to "fully fund" their reserves and, for condos/coops, has additional requirements for reserve funding.

DavidG45 (Delaware)
Posts: 994

Posted:

Quote:

Posted By AugustinD on 09/20/2021 8:09 AM

Posted By DavidG45 on 09/20/2021 8:01 AM
However, the 55+ pays an additional $20 (for a total of $105) for the age restricted clubhouse and pool. If, say, the expenses of the age restricted clubhouse only come to $19 at the end of the year, and the additional $1 is placed in the general assessment pot; [snip]

If your Declaration (1) is silent about surpluses; but (2) states that funding for the two categories of assessments is to be segregated (at a minimum and practically speaking, in a chart of accounts), then that $1 has to be returned to those owners in the age restricted part of the HOA.

Quote:

Posted By DavidG45 on 09/20/2021 8:01 AM
If it could work that way, the remaining residents could vote for the 55+ assessment to be $100/month, and the general assessment to be $10/month, then just pluck money from the $100 (only paid by 55+ residents) to pay for everything else.

For the greater part by far, the Board, not the owners, sets assessments, pursuant to the covenants and statute.

I think you ought to post the pages of your covenants here that address "assessments."

There are a LOT of clauses relating to assessments ("assessment" is found 95 times) but hopefully these are the ones you are looking for. Note "Legacy" is the name used for the age-restricted lots.

****

(2) The Executive Board shall send to each Lot Owner a copy of the budget, in a reasonably itemized form which sets forth the amount of the Common Expenses payable by each Lot Owner and after completion of the Limited Common Elements, amount of expenses related to the Limited Common Elements payable only by the Legacy Owners, on or before the commencement of the next ensuing fiscal year to which the budget applies. The said budget shall constitute the basis for determining each Lot. Owner’s contribution and assessments for the Common Expenses.

****

(c) Annual Assessments. After the first assessment has been made by the Corporation,
assessments must be made at least annually to pay the Common Expenses of the Corporation,
equally against all Lot Owners except Lot Owners subject to a Lot-Only Assessment as provided
below. Such annual assessments shall be based on the budget adopted and ratified annually by
the Corporation as provided in Article V, Section 1(b) of these Bylaws. Upon resolution of the
Executive Board, installments of annual assessments may be levied and collected on a monthly,
quarterly, semi-annual or annual basis. Any Lot Owner may prepay oneor moreinstallments of
any annual assessment levied by the Corporation without premium or penalty.

(d) Limited Common Element Assessments. In addition to the annual assessments,
after completion of the Limited Common Elements assessments must be made at least annually,
to pay the Common Expenses of the Corporation related to’ the Limited Common Elements,
equally against only all Legacy Owners, except Legacy Owners subject to a Lot-Only
Assessment as provided below. Such Limited Common Element assessments shall be based on
the budget adopted and ratified annually by the Corporation as provided in Article V, Section
1(b) of these Bylaws. Upon resolution of the Executive Board, installments of Limited Common
Element assessments may be levied and collected on a monthly, quarterly, semi-annual or annual
basis. Any Legacy Owner may prepay one or more installments of any Limited Common
Element assessment levied by the Corporation without premium or penalty.

DavidG45 (Delaware)
Posts: 994

Posted:

Quote:

Posted By AugustinD on 09/20/2021 8:21 AM

Posted By DavidG45 on 09/20/2021 8:02 AM

Posted By AugustinD on 09/20/2021 7:47 AM
From the Delaware Uniform Common Interest Ownership Act (UCIOA):

§ 81-314. Surplus funds.
Unless otherwise provided in the declaration, any surplus funds of the association remaining after payment of or provision for common expenses and any prepayment of reserves must be paid annually to the unit owners in proportion to their common expense liabilities or credited to them to reduce their future common expense assessments.

That is an interesting sidenote, thanks. I assume there is an exception while under Declarant control, because we have nearly $200,000 in our bank account right now, from four years of budget surpluses.

-- I see no such exception in the Delaware UCIOA. Your Declaration might give the Declarant more powers regarding surplus funds, though. It's possible there is a lot of legal wiggle room on the point, especially if not all the lots are sold and developed, or not all the common area has been developed yet per the promises in the covenants. I keep in mind a Declarant is somehow segregating the costs of development from the more mundane costs of running the HOA for the direct benefit of present owners.

-- Has a reserve study been done?

-- I want to double check: Are there any condominiums within this master association? The Del UCIOA requires condos and cooperatives to "fully fund" their reserves and, for condos/coops, has additional requirements for reserve funding.

-- Surplus is only mentioned once, and it does say it should be returned to the owners. I will have to check further into this.

-- No reserve study has been done yet (again, my question centers more only the accounting of the 55+ assessment)

-- There are no condos.

AugustinD
Posts: 3,698

Posted:

DavidG45, I want to be thorough. I do not want to assume. Can you please post the definition of "Limited Common Elements," as given in the Definitions section of the Declaration?

DavidG45 (Delaware)
Posts: 994

Posted:

Quote:

Posted By AugustinD on 09/20/2021 8:45 AM
DavidG45, I want to be thorough. I do not want to assume. Can you please post the definition of "Limited Common Elements," as given in the Definitions section of the Declaration?

(e) Limited Common Elements.
The portion of the Common Elements that consist of the Limited Common Elements is restricted to use and enjoyment of the Legacy Owners only and are not for use by the remaining Lot Owners.

(o) "Limited Common Elements" consist of those certain Common Elements located within the area described in Schedule "B" attached hereto as a part hereof, which are for the benefit, welfare, recreation and enjoyment of the Legacy Owners only.

****

SCHEDULE B is a document that provides legal description of the 55+ lots.

AugustinD
Posts: 3,698

Posted:

DavidG45, thank you. I believe I found the Declaration and Bylaws for your community on the net. The governing docs' requirements for itemizing the budget per the age-restricted community's capital assets (e.g. Legacy pool and anyd Legacy clubhouse) and all other assets are pretty clear. The budget has to be sent out to all owners in advance of the fiscal year to which the budget applies. The Chart of Accounts should have a similar segregation, in my opinion. Still, there's no prohibition on commingling funds in one bank account. If there is a dispute with the Declarant about this, I do not think you have a legal foundation for your argument.

I would focus on the Chart of Accounts and making sure its dollar figures reconcile.

However, post-Declarant, I would do what CathyA3 advises, and for the reasons she gives, and also given how the Declaration and Bylaws are clear about segregating. If refunds have to occur due to surpluses, separate bank accounts will make things easier to explain.

I keep in mind that CathyA3 has worked or continues to work for developers. Her expertise in this area and other areas has been obvious to me since I started posting here several years ago.

I sense you do not want to hear anymore chatter about reserve fundings. For the sake of learning, I would be interested in updates on the $200k. But I understand if your plate is full. (Or I bet more likely, and especially with Declarant turnover being imminent, your plate is overflowing.) The seed (on this subject) has been planted, for you to ponder or not as time allows.

MaxB4
Posts: 3,513

Posted:

David

Being you're still under developer control, neither you nor anyone else here would have the ability to make any changes until the owners are in control. Come back with the question when the owners gain control.

DavidG45 (Delaware)
Posts: 994

Posted:

Quote:

Posted By AugustinD on 09/20/2021 9:07 AM
DavidG45, thank you. I believe I found the Declaration and Bylaws for your community on the net. The governing docs' requirements for itemizing the budget per the age-restricted community's capital assets (e.g. Legacy pool and anyd Legacy clubhouse) and all other assets are pretty clear. The budget has to be sent out to all owners in advance of the fiscal year to which the budget applies. The Chart of Accounts should have a similar segregation, in my opinion. Still, there's no prohibition on commingling funds in one bank account. If there is a dispute with the Declarant about this, I do not think you have a legal foundation for your argument.

I would focus on the Chart of Accounts and making sure its dollar figures reconcile.

However, post-Declarant, I would do what CathyA3 advises, and for the reasons she gives, and also given how the Declaration and Bylaws are clear about segregating. If refunds have to occur due to surpluses, separate bank accounts will make things easier to explain.

I keep in mind that CathyA3 has worked or continues to work for developers. Her expertise in this area and other areas has been obvious to me since I started posting here several years ago.

I sense you do not want to hear anymore chatter about reserve fundings. For the sake of learning, I would be interested in updates on the $200k. But I understand if your plate is full. (Or I bet more likely, and especially with Declarant turnover being imminent, your plate is overflowing.) The seed (on this subject) has been planted, for you to ponder or not as time allows.

Thanks. And thanks to CathyA, if she is prerusing.

Coincidentally, while I have been pressing this point with our property manager for some time, today he just got back and said they are placing the 55+ assessments into a separate bank account. So that makes me feel much better.

The $200k surplus is definitely on my list. I didn't mean to push that to the side, I just hate to have conversations get sidetracked. I believe my questions are answered regarding the assessments. The SHOULD be accounted for independantally, but it's not necessarily a major issue if they aren't, so long as all money is spent for the things it is meant to be spent on.

MaxB4
Posts: 3,513

Posted:

I do accounting for HOA's

I would have set everything up under one general ledger, but tweet the chart of accounts to handle where the $4000.00 monthly is expensed to.

For the $20.00, on the income side, you would have an income billed and income received, then on the expense side a separate master category for the senior clubhouse with separate expense categories, plus a reserve allocation for just the senior clubhouse.

Overthinking the situation just creates problems.

MaxB4
Posts: 3,513

Posted:

On the $20K, excess income should go into the reserve account for the association and allocated to specific accounts just for the senior clubhouse and pool. These funds should be a different reserve banking account, separate from the other clubhouse.

BenA2 (Texas)
Posts: 1,273

Posted:

It does not matter if funds are co-mingled in the actual bank account. I am sure that there are small cities that have a single bank account for all of their departments. What matters is that, on paper or computer software, the money from each category (chart of accounts) is kept separate. Someone should be able to tell you, at any given time, how much you have in the clubhouse and pool accounts and all the income and expenses attributed to those accounts.

LoriM15 (Florida)
Posts: 1,009

Posted:

Quote:

Posted By MaxB4 on 09/20/2021 9:59 AM
I do accounting for HOA's

I would have set everything up under one general ledger, but tweet the chart of accounts to handle where the $4000.00 monthly is expensed to.

For the $20.00, on the income side, you would have an income billed and income received, then on the expense side a separate master category for the senior clubhouse with separate expense categories, plus a reserve allocation for just the senior clubhouse.

Overthinking the situation just creates problems.

This is the way our HOA accounting is set up. We have about half that homes that pay the regular monthly fee plus an extra amount for landscaping. We keep track of the extra monthly fee for landscaping in a separate line item account. Expenses are also tracked this way. When we are budgeting for the next year, we look at the extra income (or loss) on the bulk landscaping line item and take it into account. This year we were able to keep the bulk landscaping fee lower because we used excess funds from the previous year to offset the increase.

The actual funds are co-mingled with everything else in our operating bank account.