What could the Champlain Towers condo collapse mean to SC CPAs?
The moral of the tragic Champlain Towers story is that CPAs who audit, advise, or participate in HOAs now have much to consider.
Thoughts about the Champlain Towers Tragedy
By Walda Wildman, CPA
In May, I presented a CPE class on Common Interest Realty Associations, the most common form of which is the Homeowners’ Association. When the 12-story Champlain Towers South condominium building collapsed in Florida a month later, I started mulling over some of what I had covered in the class.
I know some of you think the 1970s are ancient history, but until then, we had few HOAs. Second homes, beach condos and time shares didn’t have their growth spurts until the late 70s and 1980s. We didn’t get unique tax rules for HOAs until the Tax Reform Act of 1976.
Thinking about this history, the first thing I thought about was that the tragedy was a lesson in “useful lives”. In the early 80s when I was a staff accountant calculating depreciation, a 35 or 40 year useful life seemed like an eternity. Interestingly, at the same time I was working with seemingly whimsical 35 year useful lives, Champlain Towers was under construction. So was a beach condo I owned for a while and so were the dams in my current residential neighborhood.
Fast-forward roughly 35 years, and today, those useful lives don’t look so whimsical. Champlain Towers has collapsed, my former condo has numerous expensive replacement issues, and my neighborhood is in the midst of spending a small fortune to repair dams.
From there, my thoughts turned to HOA repair and replacement funding. The GASB Codification requires financial statement disclosures about how much repair and replacement reserve an HOA thinks it needs and about how it plans to fund the amount. Some states require sellers to disclose such information to potential buyers. (Who, after all, wants to buy into an HOA and get stuck with a big repair assessment?) But neither GAAP nor state laws require HOAs to save up what they say they are going to need.
As HOAs proliferated, we got tax and GAAP rules that treat them as what they are — extensions of the homeowners who participate in them. And like many homeowners who don’t save for repairs, many HOAs don’t save much for repairs, especially for big ticket repairs. After all, saving for the future means current cash out of owners’ pockets. Why take cash now when the association can levy a special assessment when the money is really needed?
- When its building collapsed, the Champlain Towers South HOA was in the midst of collecting a $15 million special assessment to pay for major structural repairs noted in a 2018 engineer’s report. CNN reported on June 28 that individual owners were facing assessments ranging from $80K to $336K.(condo owners were facing assessment).
- On July 4, Champlain Towers South’s twin, Champlain Towers North, was demolished out of concern it could collapse on its own.
- On July 6, a Florida judge appointed a receiver to handle the HOA’s financial affairs. (abajournal.com- receiver appointed)
The moral of the tragic Champlain Towers story is that those CPAs who audit, advise, or participate in HOAs should consider whether the applicable HOAs have a good handle on the state of their physical plants and whether they have sufficient cash on hand to undertake timely repair and replacement work. You don’t want to be the CPA who is the last one standing with deep pockets if, God forbid, there is another Champlain Towers-like catastrophe.
Fortunately, large scale failures like the one in Florida are rare, but even smaller HOAs should take heed. Buildings and equipment need constant maintenance. Small problems left untended become big ones. Useful lives of 35 to 40 may seem far in the future but they might be right on the money. I recently noticed, for example, a beach front condo complex replacing its 45 year old stucco façade and wondered if the HOA had planned for that. Most of us will never encounter a $15 million special assessment, but $150,000 can be just as material in the right context. Individual homeowners are well within their rights to ignore saving for home repairs and HOAs have no obligation to save, but given how common HOAs are, you have to wonder if CPAs could be left holding their empty coffers?
SOME INFORMATION ON HOAs in SOUTH CAROLINA
- There are 6,945 HOAs in South Carolina.
- Roughly 1.33 million people live in HOA communities.
- Each HOA has an average of 192 residents.
- 25.9% of the state’s population lives in HOA communities.
- 36.8% of homeowners are part of HOAs.
- An estimated 511,351 homes are part of HOA communities.
- Homeownership statewide is 70.3%.
LINK TO THE SCACPA COURSE MENTIONED IN THIS ARTICLE
LIAA45 – Wagons HOA! A Roadmap for CIRAs (vimeo.com)
Walda C. Wildman, CPA, has been a SCACPA Member since 1984 and is a Member of the South Carolina Board of Accountancy, representing the 2nd Congressional District.