What Is a Real Estate Cooperative or Condominium Audit and Why Is It Required?

If you serve on a real estate cooperative or condominium board, you've probably wrestled with the annual audit question: "Do we really need to spend this money?" The short answer is yes—and here's why it matters more than you might think.

Consider this scenario: A Manhattan condominium board skipped their audit to save money, opting for a cheaper review instead. When a major water leak required emergency repairs, they discovered their reserve fund was significantly lower than in their (unaudited) financial statements. Worse, when unit owners tried to sell, prospective buyers couldn't get financing because lenders required audited statements. Property values stagnated while neighboring buildings with clean audits continued appreciating.

Understanding what audits entail and why they're essential can help you make informed decisions that protect everyone's investment in your building.

Understanding Real Estate Cooperative and Condominium Audits and Who Requires Them

An audit represents the gold standard of financial verification that an independent certified public accountant can provide. To understand why this matters, here's how the three levels of CPA services compare:

The legal framework differs slightly between real estate cooperatives and condominiums across the United States. In most states, real estate cooperatives are structured as corporations governed by state corporate or cooperative laws, while condominiums are governed by real property statutes that define unit ownership and common areas.

In New York, for example, real estate cooperatives operate under state corporate law, while condos fall under Article 9-B of the Real Property Law. Regardless of jurisdiction, requirements for financial reporting—such as whether a building must produce audited financial statements—are typically set by each community’s governing documents rather than by statute. That said, many larger or more professionally managed communities do require annual audited statements in their bylaws to promote transparency and satisfy lender or buyer expectations.

Who Actually Requires These Audits?

Several parties have a vested interest in seeing your building’s financials audited each year. Mortgage lenders are often the first to insist on it, since banks need confidence in a property’s financial stability before approving loans for individual units. Recent Fannie Mae guideline changes have only intensified that scrutiny, making strong financial statements more important than ever.

Your building’s bylaws may also mandate annual audits. Most NYC real estate cooperative and condominium documents include this requirement, though the exact language often depends on when the bylaws were drafted. Even when not explicitly required, an audit remains a best practice that signals responsible financial stewardship.

Buyers and their attorneys rely heavily on audited financials during due diligence. A clean audit can build buyer confidence, while the absence of one can slow down sales and even depress offers. Finally, an annual audit helps your board fulfill its fiduciary duty to shareholders or unit owners. It promotes transparency, supports sound decision-making, and strengthens trust in the board’s financial management.

Concerned about your building's audit timeline or requirements? Contact Revonary to discuss your specific situation and ensure you stay on track.

What Audits Examine and the Process Involved

Real estate cooperative and condominium audits dive deep into every aspect of your building's finances. Here's what auditors actually examine:

• Cash Flow Analysis: Auditors verify whether your building generates sufficient income to cover operating expenses, debt payments, and capital improvements. They examine maintenance or common charge collection rates, delinquency patterns, and seasonal variations that could impact cash flow. For real estate cooperatives, this includes analyzing the underlying mortgage structure—whether it's interest-only (meaning the entire principal balance becomes due at maturity) or amortizing, and assessing refinancing risks in the current interest rate environment.
  
  
• Reserve Fund Evaluation: This analysis has become critical as lenders tighten requirements. Auditors don't just verify the dollar amount in reserves: they assess whether those funds align with your building's actual capital needs. They review reserve studies, planned major projects, and the building's track record of funding reserves versus relying on special assessments. A building with $500,000 in reserves might seem healthy, but if it needs a $1 million roof replacement in three years with no funding plan, auditors will note this concern.
  
  
• Debt and Compliance Review: For real estate cooperatives, auditors examine underlying mortgage covenants, including debt-to-income ratios and cash flow requirements that could trigger lender intervention. Condominium auditors review common charge loan agreements and any restrictions on the association's ability to incur additional debt. 
  
  
• Internal Controls Assessment: Auditors evaluate the systems preventing fraud and errors. This includes examining approval processes for large expenditures, segregation of duties between those who authorize payments and those who write checks, and procedures for collecting and depositing maintenance fees. Weak internal controls often indicate broader management issues that could affect your building's financial stability.

Interpreting Your Audit Results

The auditor's opinion letter provides the overall assessment, but understanding the nuances requires looking deeper:

• Clean Opinion with Emphasis of Matter: Even "clean" audits may include emphasis paragraphs highlighting significant events like major litigation, upcoming mortgage maturities, or substantial capital projects. These aren't necessarily problems, but they alert readers to important factors affecting your building's future.
  
  
• Qualified Opinion Scenarios: Common qualifications include inability to verify certain balances (perhaps due to poor record-keeping), disagreements with management's accounting methods, or limitations on the scope of the audit. Each type of qualification signals different underlying issues requiring board attention.
  
  
• Going Concern Considerations: When auditors question a building's ability to continue operating, they're usually concerned about cash flow problems, upcoming debt maturities without refinancing plans, or significant deferred maintenance creating safety or legal issues. This designation doesn't mean immediate failure, but it does require prompt action.

Key Financial Metrics to Monitor

Beyond the opinion letter, sophisticated boards focus on several critical ratios:

• Operating Ratio: Compare annual operating expenses to total revenue. A ratio consistently above 95% may indicate insufficient reserves or underpriced maintenance fees. However, a very low ratio might suggest deferred maintenance or inadequate reserve funding.
  
  
• Debt Service Coverage: For buildings with mortgages or loans, this measures whether net operating income adequately covers debt payments. Lenders typically require coverage ratios of 1.2x or higher, meaning income should exceed debt service by at least 20%.
  
  
• Reserve Fund Adequacy: Calculate reserves as a percentage of annual operating expenses. While there's no magic number, reserves below 15-20% of annual expenses often concern lenders and buyers, especially for older buildings with higher maintenance needs.
  
  
• Collection Efficiency: Track the percentage of maintenance fees or common charges collected within 30 days. Collection rates below 95% may indicate affordability issues among shareholders/owners or problems with the collection process.

Understanding the Footnotes

The footnotes to your building’s financial statements often reveal the most important details about its financial health and future. They disclose commitments and contingencies, such as ongoing litigation, construction contracts, or regulatory compliance issues that could affect the building’s financial position. They also outline subsequent events—significant developments that occurred after year-end but before the audit was finalized—which can provide valuable insight into emerging risks or opportunities.

In addition, footnotes explain accounting policy changes that may impact year-to-year comparability, helping readers understand why certain figures differ from prior reports. Finally, they identify related party transactions, highlighting any financial dealings between the building and its board members or management company that could create potential conflicts of interest.

Protecting Your Investment Through Professional Auditing

Rather than viewing audits as expensive compliance exercises, smart boards recognize them as essential investment safeguards. A well-conducted audit identifies operational improvements, prevents financial surprises, and maintains the documentation necessary for smooth real estate transactions.

The audit process also encourages better year-round financial management, as your team knows their work will face independent scrutiny.

At Revonary, we specialize in real estate cooperative and condominium audits, understanding the unique challenges these properties face. We work efficiently to minimize disruption while providing clear, actionable insights that help boards make better financial decisions.

Our team recognizes that every building has distinct characteristics, from small walk-up cooperatives to luxury condominiums with complex amenities. We tailor our approach accordingly and ensure board members understand the results so they can effectively communicate with residents.

Ready to ensure your building's financial health? Contact Revonary today to learn how our specialized expertise can provide the thorough, valuable audit process that protects and enhances your property investment.