J.S. from Maryland writes:
Dear Mister Condo,
My condo is in Maryland. Why don’t associations record the initial cost of the land and common buildings on their balance sheets? Where do you post expenditures for capital assets like road resurfacing, new roofs, etc?
Mister Condo replies:
J.S., I am not an accountant nor am I an expert on Maryland condo association recordkeeping so I will do my best to give you my understanding of the principals involved and what I have learned from my experiences in Connecticut. If you require a more thorough response with local flair, may I suggest you consult with your local chapter of the Community Associations Institute (CAI), of which there are two in Maryland? (i.e. Chesapeake Region Chapter at http://www.caimdches.org/ and the Washington Metro Chapter at http://www.caidc.org/)
All of the land and buildings that are owned in common are part of the association records and the deed and covenant that define the association with regards to municipal records. You can bet they are a part of your local municipality’s Grand List and are taxed as such. However, the condo association Balance Sheet is used to list all of the assets and liabilities of the association at any given time. Assets are most commonly cash either found on hand, in investments like CDs, in the Operating Fund, or in the Reserve Fund. Liabilities are numerous and include all of the association’s expenses (insurance, common utilities, repairs, and such). You couldn’t use the land or buildings to offset these expenses so they don’t appear on the Balance Sheet. The simplest explanation I can offer to describe the Balance Sheet is that it shows the “net worth” of the association which is a useful tool in determining if the association is being run in a fiscally prudent manner. A positive net worth indicates a good job while a negative net worth indicates a potential problem and the possible necessity for increased common fees or special assessments.
Expenditures for capital assets like road resurfacing and such are ideally budgeted and paid for from association reserves. Once a road is built, it is a known fact that it will need to be repaired and/or replaced over time. In theory, the association can build a Reserve Fund for such repairs and replacements at the time the capital improvement is initially installed or replaced at a later date. This is the business of Reserve Specialists. They look at all of the commonly owned assets and use a formula of useable life and likely replacement costs to come up with a suggested Reserve Fund contribution amount that the community should adhere to. However, not all communities use Reserve Studies or have adequately funded their Reserve Fund over the years. In that case, it is not uncommon for special assessments to be levied or loans to be engaged to make these needed repairs. In each case, the accounting treatment is different. Again, I suggest you speak with a local expert from your state on the specific accounting treatment for condo associations in Maryland.
Hope that explanation helps! All the best!