FHA Condo Accounting Question

R.C. from New Haven County writes:

Dear Mister Condo,

The FHA requirement for associations to put 10% of the common charges into a separate Reserve account creates a problem with using a spreadsheet. The agency we are using to assist with our FHA compliance explains that the 10% value must be based on Common Charges, (what is collected in fees); that is what the FHA looks at.

Setting up the Expenses column to contain a line item for the 10% FHA Reserve, creates a “circular reference” in a spreadsheet by attempting to calculate the 10% line item in the expenses while referencing total common charges to create the 10%. Do you have an example of how a spreadsheet is set up avoid this problem?

Mister Condo replies:

R.C., I am not a CPA but I think you are just looking for a simple “how to” tip here. If I understand your issue completely you are using a spreadsheet program like Excel or such to produce your report to demonstrate your FHA eligibility compliance and you have included a line item for your Reserve Fund contribution that is based upon the total common fees. Since the total common fee includes the Reserve Fund contribution of 10% (entered as a percentage rather than a dollar figure) it creates a circular reference that continually compounds the 10% by 10% over and over again. Is that correct?

Well, the good news is that you are practicing due diligence by contributing a healthy amount to your Reserve Fund each year and that you are practicing good governance by keeping your association FHA eligible.  The only issue here is that the spreadsheet program is proving a bit tricky. I can tell you of the technique that my association uses that you may find useful.

We have our annual budget spreadsheet broken down by sections for each of the expense items. There are sections for insurance, common utilities, vendor contracts for landscaping and snow removal, legal and management fees, and any other fees that we anticipate for the upcoming year. Then we subtotal that section and base our Reserve Fund contribution as a percentage of the subtotal. That way we simply add 10% to the subtotal (which changes every year) and still make a proper contribution to our Reserve Fund that will keep us FHA compliant. If you were to follow the same formula, your spreadsheet might look like this:

Insurance                              $50,000.00

Utilities                                   $  5,000.00

Landscaping                         $12,000.00

Snow Removal                    $12,000.00

Management Fees               $ 5,000.00

Subtotal                                 $84,000.00

Reserve Fund at 10%         $ 8,400.00

Total Fees                             $92,400.00

This would solve your circular reference problem and also allow you to adjust your Reserve Fund contribution based on its percentage of common fees collected. This is an oversimplified example but I think you get the idea. All the best!