Agreements to share costs are not new. Whether a one association pays for certain expenses that are enjoyed by a sub association or an adjacent association, reserves funding for major repairs and replacements set aside in a master, or shared access or use of common areas, it is important to have a clear understanding of your Association’s legal responsibilities together with accurate and timely accounting and reporting.
Shared cost or funding arrangements may be articulated in the respective associations’ governing documents or supplemented via a formal legal shared cost or shared maintenance agreement. Such agreements would be agreed to by the respective parties. Sometimes, shared costs are termed assessments. Whatever the label, it is important to understand what costs are allocated and how they are allocated to each party.
Costs can be allocated based upon the nature of an expense and its measurement characteristics. Some condominium buildings are set up with a condominium master association, a condominium commercial association and a condominium residential association. The condominium master association pays vendors for common area services, and other costs such as utilities and insurance. Both the residential and commercial associations are required under the association’s Declaration of Covenants, Conditions and Restrictions to pay the master association for a share of expenses incurred by the master association. The Declaration will present the expense categories to be allocated, together with the allocation method, which commonly includes either an allocation based on square footage and/or specifically identifiable costs to be assigned.
Some high-rise residential condominiums are housed in buildings that include a hotel. Depending upon the physical structure and relationship between residential units and the hotel, there are frequently allocations of physical access and/or provision of services between the association and the hotel. Details of the access, accommodations, and services provided should be documented in a legally binding shared cost/shared access agreement.
Some associations provide access or easement rights to other associations or entities which require the benefitting entity to pay for the access. Sometimes access is provided in exchange for a fee that is not a cost share. Other times an agreement is prepared that identifies costs to be allocated and charged by the paying party to the using or benefiting party. An example might be the use of a road, or the use of an access or entry area into an association that also provides access for the other association or entity. Depending on the complexity of the access, perhaps the association pays for security or gate attendants, utilities, landscaping, and other costs to maintain the shared area.
Shared costs can be charged periodically based on actual expenses incurred. Alternatively, more commonly, entities prepare an annual budget and set the financial terms for the next fiscal period. The association receiving the benefits of shared costs will generally pay its budgeted cost allocation to the other association monthly. Each year, the parties to shared cost arrangements should review budgeted cost projections for the next year and determine the effect of any changes to allocated costs and thus on owner assessments. Often, shared cost agreements provide for an annual reconciliation mechanism. Upon mutual acceptance of a reconciliation, one party might pay or refund the other party for under or over payments when compared to actual costs incurred. One of the keys to reducing conflicts is to maintain accurate accounting, copies of all documentation including vendor contracts and invoices, cleared checks paid to vendors, accounting ledgers and correspondence between the parties.
Accounting by the payor of costs and recipient of reimbursements typically presents a revenue line item referred to as shared cost income or reimbursements. Possibly assessments income (from the sharing party). The paying association usually records a shared costs expense or perhaps a master assessments expense. In cases where cost sharing is in dispute, and one party has stopped making payments, we recommend that the (non)paying party continues to record an expense together with a liability for the amount presented in the cost share agreement. The receiving party should record a receivable from the other association for the disputed amount. There are times during disputes that the paying association does not record its liability to the other association. This can cause the association to under record expenses and liabilities, potentially leading to budgeting and cash challenges.
Recommendations: Read and understand the cost share agreement. Budget appropriately. Prepare and maintain accurate and timely accounting records. Maintain all supporting documentation including vendor contracts and invoices.
