After Condo Waiver Period Ends, Financial Confusion Can Ensue

When a new condominium is formed, the sponsor often offers an agreement known as the "waiver period," which refers to a time period after the building begins to operate where the unit-owners don’t pay any common charges. Lasting anywhere from six months to several years, it is used as a marketing tool to make the apartments more attractive to buyers. But Chris Saray, manager at the accounting firm WilkinGuttenplan, says that when the waiver period ends and unit-owners take over, there can be concerns about unpaid bills, maintenance contracts and other operational concerns, since operating costs and all expenses for the building fall on the unit-owners.

Research before you pay. Before the transition, ​​it is critical that the condo board review all financial documents and invoices carefully, ensuring that the sponsor has met their financial obligations. If there are uncertainties regarding whether certain costs should be borne by the sponsor, it is best to resolve those issues before paying any outstanding bills. “A proactive approach really needs to be taken, because the more deficiencies — which usually become apparent pretty quickly — and the more disputes over them, the more contentious things could get,” Saray cautions. “The best practice is to nip problems in the bud. “When there's an invoice that comes through for a repair that the board feels is essentially the sponsor's responsibility, the discussion should be had before the bill is paid so the board won’t be out of pocket.”

In-lieu charges. Once the waiver period ends, some sponsors implement what are known as "in lieu charges." These charges are lower than the full common charges as specified in the original offering plan’s Schedule B budget, which lists the projected income and expenses during the condo’s first year of operation. “If the Schedule B budget calls for $1 million in common charges, the sponsor might reduce it to $800,000,” Saray says. The lower in-lieu charges, he explains, are based on the assumption that not all the expenses outlined in the budget are being spent. For example, HVAC systems might still be under warranty, reducing maintenance costs, and heating costs may be lower because the building is not fully occupied.

But boards need to understand that in-lieu charges may increase as the building becomes more fully occupied. “The presumption is that the actual expenses are going to increase, so the in-lieu charges are kind of a moving target,” he says. “So you might have $800,000 of reduced common charges in December, which goes up to $900,000 in January as utilities bills increase and more people are living in the building. But boards should know that in-lieu charges can never exceed the full-budget operating costs as outlined in the Schedule B.”

The all-important audit. When the board takes control after the waiver period ends, one of its first priorities should be to conduct an audit of the building's finances. This involves reviewing the financial records from both the waiver period and the in-lieu period to ensure that all expenses are accurately recorded and assigned. “To do this, you should bring in an independent accountant to go over the books,” Saray says. “It’s not a task that should be left to the managing agent, especially if they were hired by the sponsor.”

Discrepancies are not uncommon, but they don't necessarily lead to a deadlock. “Usually it’s just a matter of clarifying who is responsible for what costs,” Saray says. “Sponsors may agree to cover certain expenses, but having the proper documentation is key, which is why boards should work closely with their accountants and management to maintain detailed records of all financial transactions.” Good communication is also important. “When the sponsor exits and the board assumes full control of the building's operations, these steps will help avoid financial confusion and ensure a smoother handover of responsibility.”