R.M. from Hartford County, Connecticut writes:
Dear Mister Condo,
Our association is considering selling a unit owned by the HOA. I am wondering the net proceeds after any costs, taxes, etc., how would it be classified in the balance sheet. Would it be operating? Would it be considered surplus and distributed back to the unit owners? I have other questions, also, such as we have been given a back-of-the envelope of what we could net, but no comparison to the loss of rental income, any renovation that would need to be done in keeping it, especially long-term, in order to get a better idea if it is the best decision to sell it. There has not been any mention of what they intend to do with the proceeds, and they don’t tend to answer questions in a meaningful way. But it would be my understanding they can’t just add it to reserves without identifying what projects they are newly reserving for? I searched for similar questions, but didn’t see any, but this can’t be all that uncommon.
Mister Condo replies:
R.M., great question. When an association has taken steps to procure a unit, it is typically in the association’s best interest to sell that unit when market conditions are favorable and get a dues-paying owner in place. While it is common for the association to hold on to the unit for a while and either rent it out to create income to cover the lost common fees, it is not common for the association to function as a long-term landlord as that was not why the association was created. The Board is largely in charge of what happens next and they should apply good business rules when making decisions. As long as the unit is unencumbered (no mortgage or tax liens), the association can sell and even profit from the transaction. The income is regular income to the association and deposited into the operating fund. It may be taxable if a profit is made. At the end of the year, it would be treated like any other income as described by the association’s governing documents or state law. The Board cannot typically roll it over in the Reserve Fund without a vote of the unit owners to do so. I would suggest that since it is an unexpected profit, as you describe, rolling it into the Reserve Fund may be a sound choice, especially this year as inflation has run so rampant that most Reserve Fund contributions could use a good bolstering. All the best!