How Condo Boards Can Make Sure the Sponsor Pays His Share

Christopher Saray is a manager at WilkinGuttenplan CPAs & Advisors. This is an edited version of his recent interview with Habitat. 

At newly built condos, it’s common for construction problems to crop up. But accounting and record-keeping are equally important, as one of your clients recently discovered. What’s the story?

We were engaged to audit a 120-unit condo that had been operating for a couple of years. It was a building with residential and commercial units. Reviewing the prior financials, we found that there was a pretty significant balance – $200,000 – due from the sponsor. 

What happened after you discovered the outstanding balance?

We reached out to the sponsor representative with a detailed letter that said, "Per our audit, you owe $200,000 to the condo for these expenses. Can you please approve this amount?" The sponsor said, "I don't think we owe this sum of money." So we did some digging and found we were in agreement for the activity for the current year's audit. Then we obtained ledgers and records from management and from the sponsor dating back to the commencement of operations. We looked a little further into individual account details. The root of the problem, we found, was the complexity of this building.

Because there were both residential and commercial units?

Yes. The sponsor still owned many unsold residential units and a few of the commercial units. There was a kind of pass-through set-up when it came to utilities. The condo incurred the utility expenses, paid Con Ed and then billed back the unit-owners for the usage. Because the sponsor owned a lot of units, a lot of those charges went to the sponsor. In turn, the condo received a lot of money from the sponsor, and some of it was in lump sum. The sponsor would cut a check to the condo for, say, $50,000, some of it for utility charges, but some of it would also be for expenses that the board had requested reimbursement for. There were so many different accounts and so much activity between the two parties that it got to a point where it just wasn't always clear where the money coming in should be applied. And in some instances, it just got put in the wrong place.

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So what is the takeaway for boards?

First, it's important for boards, management and everyone involved to discuss the amounts on their balance sheet with their auditors. A board should know how the amounts were calculated, where it came from, and the activity year over year if it's a recurring amount. The board should have an understanding of how the auditor confirmed the amount. If the auditor is not doing so, the board should recommend that they do so and have it approved by the sponsor.  

Management must have a role to play here as well?

A board can ask management to be very detailed with sponsor-related transactions in their general ledger account. For example, if there’s a description for a specific expense in the repairs account in the general ledger, writing "TO BE BILLED BACK FROM SPONSOR" in big bold type would be helpful to an auditor or to a managing agent reading the monthly financials. The board ultimately has to approve amounts being paid to vendors, and when you're reviewing those bills, it’s a good idea to pinpoint those expenses that are to be billed back to the sponsor, have a conversation with the sponsor rep and maybe just hand the bill over to them so they can pay it directly to the vendors. That way you avoid the board paying for it out of the condo's account, setting up a receivable from the sponsor, sending a bill to the sponsor for reimbursement, then waiting for that money to come in. 

That way the building doesn't act as a pass-through?

Exactly. It's common practice – 95% of the time – for the condo to pay the bill and request reimbursement from the sponsor. In a perfect world, you wouldn't even have that expense running through the records of the condominium when it’s not a repair that the condo should have paid for.