HOA assets are the things of value the association owns or is owed: cash in its operating and reserve accounts, investments, assessments that owners have not yet paid, expenses paid in advance, and equipment or property held in the association’s own name. What surprises many board members is what is usually missing from that list. The clubhouse, pool and private streets the association maintains often do not appear on its balance sheet at all.
You are not expected to memorize this, and reading it will not turn you into a CPA. Any big decision that depends on the association’s assets will involve the whole board and usually its accountant or attorney. But every owner has a stake in how well the association runs, and a working knowledge of its assets helps you read the financial statements and ask better questions. You can find related articles in our HOA finances section.
First, What Kind of Organization an HOA Is
Assets are more than the money collected from assessments. To frame the subject, remember that most HOAs are corporations. They are not corporations like Ford or AT&T. Most are nonprofit corporations formed under state law, and some are unincorporated associations. “Nonprofit corporation” may sound like a contradiction, but it simply means the corporation does not exist to earn a profit and distribute it. You can think of the owners as something like shareholders, with two differences: they are members because they own a home in the community, and nobody receives a dividend.
Nonprofit does not mean tax-free. An association generally files a federal income tax return every year. Many elect to file Form 1120-H under section 528 of the Internal Revenue Code. Under that election, “exempt function income,” meaning the dues, fees and assessments paid by owners as owners, is not taxed. Other net income, such as interest on reserve accounts or money received from nonmembers, is taxed at a flat 30 percent (32 percent for timeshare associations). To qualify, at least 60 percent of the association’s gross income must be exempt function income and at least 90 percent of its expenses must be for acquiring, building, managing, maintaining and caring for association property. The election is made separately for each tax year, and the IRS instructions for Form 1120-H note that an association may file a regular corporate return instead if that produces a lower tax. Our article on homeowners association taxes goes into more detail.
How the association is organized and taxed also sheds light on how its assets are counted and, in the rare case of a dissolution, what happens to them.
What Counts as HOA Assets
Assets matter for more than balancing the budget. Before buying into a community, a careful buyer will want to know what the association has, because nobody wants to join an association that cannot afford the services and amenities it promises. Our article on the documents a buyer should review explains where to look.
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The assets you will see most often on an association’s balance sheet are these:
- Operating cash. The checking account used to pay the regular bills.
- Reserve cash and investments. Money set aside for future repair and replacement of major components, usually held in separate savings accounts, certificates of deposit or similar low-risk investments.
- Assessments receivable. The total that owners owe the association in unpaid assessments. Financial statements often reduce this by an allowance for amounts that are unlikely to be collected.
- Prepaid expenses. Costs paid ahead of time, such as an annual insurance premium that covers months still to come.
- Other receivables and deposits. Examples are insurance claim proceeds that have been approved but not yet received, and deposits held by a utility.
- Equipment and other personal property. Furnishings, recreational equipment and maintenance equipment that the association owns.
- Real property, in limited cases. This is the category that needs the most explanation, and it is covered below.
Fund Balance Is Not an Asset
Another line on the balance sheet is the fund balance, sometimes labeled members’ equity or retained earnings. It is easy to mistake for a pot of money, but it is not an asset. It is what remains when the association’s liabilities are subtracted from its assets: the accumulated surplus or deficit from all prior years, plus the net income for the current year to date. It may reflect leftover funds from several years or from only the last one. Most associations show at least two fund balances, one for operations and one for reserves.
How Assessments Show Up
Assessments are the biggest piece of the picture, and under accrual accounting they appear in three different places depending on timing. An assessment billed and paid for the current period is revenue, and the cash is an asset. An assessment billed but not yet paid is an asset called a receivable. An assessment an owner pays ahead of time is a liability, usually labeled prepaid assessments, until the month it applies to arrives. The treasurer and the finance committee need to understand these distinctions in more detail, because they affect what the monthly statements show as revenue.
What an HOA Usually Does Not Record as an Asset
The largest things an association takes care of, its land, buildings, pools and private streets, are often absent from the balance sheet. That is not an error. The accounting standards for common interest realty associations, found in Topic 972 of the FASB Accounting Standards Codification, treat common real property differently from the way a business treats its buildings.
In general terms, most associations other than cooperatives do not record common real property that is directly associated with the units, whether or not the association holds title to it. Real property that is not directly associated with the units is generally recorded only when the association holds title or other evidence of ownership and either can sell the property at the board’s discretion and keep the proceeds, or uses it to generate significant cash flows from members based on usage or from nonmembers. Common personal property, such as furnishings and recreational or maintenance equipment, is recorded. Where the association holds title to common property that is not on the balance sheet, the notes to the financial statements describe it.
Ownership adds another layer. In many condominiums the association does not own the common area in the first place, because the unit owners own it together. In many planned developments the association holds title to the common area. Either way, how the standards apply to a particular property is a judgment call. A clubhouse rented to outside groups, a unit the association acquired through foreclosure and a parcel of land it could sell may each be treated differently. The association’s CPA decides the treatment, and the board’s job is to give the CPA accurate facts.
This matters when you read the balance sheet. An association can show a few hundred thousand dollars in assets while being responsible for roofs, roads and equipment that would cost many times that to replace. The balance sheet does not tell you what condition those components are in or what replacing them will cost. The reserve study does, which is why the two documents should be read together. See what a reserve specialist does for how that study is prepared.
How HOA Assets Fit Into the Association’s Accounting
Assets are worth understanding because they are one half of the balance sheet. The balance sheet is a snapshot of the association’s financial position on a single date. It lists the assets on one side and the liabilities and fund balances on the other. Assets minus liabilities equals the fund balances, which is the association’s net worth on paper. The two sides must always be equal, and that is where the name comes from. Our walk-through of the parts of an HOA financial report shows how the balance sheet fits with the other statements.
Because the assets are what keep the community running, protecting them is a priority. A system of checks and balances, with duties divided among different people, helps make sure the records are right and the money is where it should be.
- Separate three jobs: receiving money, paying bills and reconciling the bank accounts. No single person should do all three.
- Have the board, or at least the treasurer and one other director, review the balance sheet, the income and expenses and the bank reconciliations every month.
- Keep reserve money in accounts separate from operating money.
- Require more than one person to approve withdrawals from reserves and large transfers.
- Carry fidelity (crime) insurance that covers the people who handle the association’s money.
Existing Asset or New Improvement?
From time to time the board has to decide whether a project repairs or replaces something the community already has, or adds something new. The distinction determines where the money can come from. Reserve funds are generally meant for the repair and replacement of existing major components. Resurfacing a pool that is already part of the community is work on an existing asset. Adding showers where there were none is a new improvement.
New improvements usually have to be paid for another way, such as operating funds or a special assessment, and many governing documents require an owner vote for capital improvements above a set cost. Some projects fall in between, for example replacing a worn wood fence with a more expensive material. When the answer is not obvious, ask the association’s attorney and CPA before committing reserve money.
What Happens to HOA Assets If the Association Dissolves
Finally, consider the common areas themselves: recreational facilities, sidewalks, equipment and the rest. If an association were to dissolve, the owners would have to decide what becomes of all of it, and that is harder than it sounds. A sidewalk cannot be divided among 200 owners, and the recorded covenants and the duty to maintain the common area do not vanish because the corporation does.
State law and the governing documents control the vote required, which is often very high, along with what happens to common property and how any money left after the debts are paid is distributed. Dissolution is rare, and the details only need to be fully understood if it is seriously proposed. A board in that position should involve the association’s attorney from the first conversation.
In California
Several California statutes bear on the points above.
- Form of organization. The Davis-Stirling Act defines an association as a nonprofit corporation or unincorporated association created to manage a common interest development (Civil Code section 4080).
- Who owns the common area. In a condominium project, unless the declaration provides otherwise, the common area is owned by the owners of the separate interests as tenants in common, in equal shares, one for each separate interest (section 4500). In a planned development the common area may be owned by the association or in common by the owners (section 4175).
- Accrual basis. The annual budget report must include a pro forma operating budget prepared on an accrual basis (section 5300).
- Monthly review. Unless the governing documents are stricter, the board must review each month the reconciliations and statements for the operating and reserve accounts, actual revenues and expenses compared to the budget, and the delinquent assessment receivable reports, among other records (section 5500).
- Reserve withdrawals. Withdrawing money from reserve accounts requires the signatures of at least two directors, or of one officer who is not a director and one director. Reserve funds may be spent only on the repair, restoration, replacement or maintenance of the major components the fund was established for, or on litigation involving those components (section 5510).
- Fidelity coverage. Unless the governing documents require more, the association must maintain crime insurance, employee dishonesty coverage, a fidelity bond or the equivalent for its directors, officers and employees in an amount at least equal to its reserves plus three months of total assessments. The coverage must include computer fraud and funds transfer fraud and, if the association uses a managing agent or management company, dishonest acts by that company and its employees (section 5806).
- Outside review. Unless the governing documents are stricter, a licensee of the California Board of Accountancy must review the financial statement for any fiscal year in which the association’s gross income exceeds $75,000 (section 5305).
- Dissolution. As long as an owners’ association is still obligated to manage or maintain any lot, unit or area in the development, it may not transfer all or substantially all of its assets or file a certificate of dissolution without the approval of 100 percent of the members (Corporations Code section 8724).
The Law Behind This Article
Every legal point in this article comes from the official text. Each link below opens it in a new tab.
Civil Code sections: 4080 · 4175 · 4500 · 5300 · 5305 · 5500 · 5510 · 5806
Corporations Code sections: 8724
Other official sources: IRS instructions for Form 1120-H
This article is general educational information, not legal or financial advice. Laws vary by state and your association’s governing documents control many of these questions, so check with your association’s attorney or another qualified professional about your situation.