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What is CIRA and what does it mean for co-ops?

A new mandate from the American Institute of Certified Public Accountants (AICPA) now governs the preparation of a cooperative or condominium's annual audited financial statements. Specifically, effective with the 1992 audited financial, all common interest realty associations (CIRA), such as coops or condos, must include information about the funding of projected major repairs and replacements.

To comply with this requirement, coops and condos must supply their accountants with information about existing common building components, their projected remaining useful lives, and the estimated costs to repair or replace them. A clearly defined statement must be included describing how these anticipated major repairs and replacements will be funded.

Satisfying this mandate takes some planning. But it's a valuable activity because it will help a coop or condo with both short and long-term budget planning.

To undertake a long-term planning program such as the one required by the AICPA, the coop or condo should condua a study to estimate the remaining useful lives and the replacement costs of the components of common property. All mechanical systems, the building's infrastructure and facade, and similar capital items should be examined. These components may include the roof, exterior walls, heating system, plumbing, windows, lobby, elevators, security systems, and furnishings and equipment. While not required, it may be wise to review the effectiveness of current preventive maintenance programs and service contracts.

A professional engineer may be engaged to conduct the study, though the AICPA does not require this. The study my be conducted by licensed contractors, who inspect the property and provide estimated costs to repair or replace the common property components.

The projected estimated costs need not account for inflation, but the accountant should indicate this fact in the footnotes to your financial statement.

If a co-op or condo does not comply with the new requirement, and does not conduct a study, the accountant should include a footnote to this effect in the property's audited financial statement. It is then necessary to indicate the coop or condo's intention to utilize available cash, borrow funds, increase maintenance, or levy special assessments to fund repairs or replacements, or the association's intention to delay repairs and replacements until funds are available.

A similar paragraph would be included if the co-op or condo has conducted the study, but has not formulated a funding plan.

The information disclosed in the annual audited financial statement has significant impact on the dealings between potential purchasers, lending institutions and owners and the property. Understandably, these individuals can take a more informed, and possibly, more favorable action if they can clearly see the short and long-term plans for the property's financial, structural, and mechanical viability.

Once the repair and cost projections are made, the board, in conjunction with the managing agent, and perhaps an engineer, can establish the priorities for significant capital expenditures. A specific plan of action, including financial projections and funding should be outlined and submitted to the coop or condo's accountant for inclusion in the annual audited financial statement.

The plan needs to be reviewed and updated annually to monitor progress and include new information.

While compiling the information may appear to be an additional burden for a board, the planning will help current and future boards develop a clear perspective on long-term expenses, the direction of maintenance and common charges, and the physical and structural integrity of the building. Documenting this information and earmarking funds for specific projects over the long haul will help the building minimize emergency spending and provide a road map for upcoming financial needs.
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Title Annotation:Review & Forecast, Section V; common interest realty associations; cooperative apartment buildings
Author:Gold, Marvin
Publication:Real Estate Weekly
Date:Jan 27, 1993
Previous Article:Meeting real estate needs as the world turns.
Next Article:RE can lead NYC out of the recession.

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