August 2024 CT

PROCEDURE REPORTS... from page 18.

As the new PREDFDA regulations and the new law have been implemented recently no communities have been through transition with these changes. How these changes will impact the transition process is unknown at this time. One thing that is certain is that the term “benefits derived” will soon be a thing of the past. The procedures followed by the accountant in the prepa ration of the report are in accordance with attestation stan dards here in the United States. There are very strict rules that have to be followed and the report is reviewed by at least two partners in the CPA firm. The report will list what the results are for each of the procedures performed and a conclusion with a total amount that may be due from the developer based on those procedures. Once the report is

go through transition the new board usually has a study done to check for any construction defects in the com mon elements as well as a new reserve study for future funding. However, that study is prepared using the cost index of when transition took place not when the buildings or other common elements were constructed. If the new study is used to calculate the shortfall in reserve funding, the developer could use the argument that part if not all of the difference is caused by the increase in costs rather than any deficiencies in the schedule used in the initial offering statement. That is why it is very important to use the cost index for the initial year of construction and any subsequent updates. What we do have to keep in mind is effective July 21, 2021, the Planned Real Estate Development Full Disclosure Act (PREDFDA) was amended for any new developments or new phases of already existing developments that are registered after that date. We will not go into detail regard ing the new amendments however the new regulations do require the following to be done by developer: 1) Pay full maintenance fees on all declared units 2) Fund normal operating deficits, if any 3) Refund surpluses in a given year if any, after approval by the unit owners 4) Not use working capital contributions to fund regular operating expenses Questions have been raised regarding what constitutes declared units as the new regulations are not completely clear. In addition, it is also not clear if declared units need to pay full maintenance fees or can they pay proportionate share based on fixed costs. Furthermore, in January 2024 a new law (S2760) was signed by the Governor of New Jersey that covers reserve and preventative maintenance funding. Preventative main tenance is what previously was known as the deferred maintenance fund. The new law has implications for new construction in that there are certain requirements the devel oper has to follow prior to handing over control to the unit owner board.

“...in January 2024 a new law (S2760) was signed by the Governor of New Jersey that covers reserve and preventative maintenance funding.”

complete, a draft is issued to the responsible party handling the matter for the Association, usually the Associations attor ney but it may be the board directly as well. In addition, with the draft report a representation letter is issued as well. What is a representation letter? It is a letter that is technically sent by the engaging party to the accounting firm and it lists all the representations made by the engaging party. What that means is that it states the engaging party takes full responsibility for all the informa tion provided to the accountant. Furthermore, it states that the report only includes the procedures that it required the accountant to perform and that if other procedures were required, the conclusions in the report may be different. The letter also states that the report is only intended for a certain purpose by certain parties and will not be used aside from those. Normally after the draft is issued the accountant has a meeting with the board and the attorney to discuss the report and its conclusions. Once the attorney and/or the board are satisfied with the report, a representative of the board will sign the representation letter and send it back to

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AUGUST 2024