Developer Articles

Tripless Transition
Developers of homeowner association properties have a dual role. Besides handling all the elements of development and construction, the developer is charged with proper management of a homeowner association, a very complex legal entity.

In the initial stages of development, the developer owns the lion’s share of ownership interests and is in control of the Board. The developer usually elects himself President and positions employees or associates as directors. However, when sales reach a certain level (often 75% but varies according to the governing documents), a "transition" phase begins. Transition means that control of the HOA moves from the developer to the new homeowners. If the project is very large and has many phases, it may take years to get to that point. For smaller projects, it’s usually a matter of a year or less.

Unfortunately, many developers trip over the transition phase through lack of understanding, planning and attention. In an ideal world, the developer should begin the transition process long before the formal transition meeting since there is much to consider. However, since developers tend to be better developers than HOA managers, they usually cobble together a transition meeting on short notice, a few owners show up and end up being elected to the board by default. That board is usually clueless since the developer fails to inform them about HOA business and pretty much dumps it in their collective lap. (The new board’s collective heads are nodding and it sounds like a freight train....been there, had it done to us.)

The implications of such sloppiness are grave for the developer. From a legal standpoint, state statutes usually require an orderly transition process and information exchange. But most states do not monitor the process so many developers bypass or run roughshod over it. But from a practical standpoint, developers that treat transition cavalierly often reap a whirlwind of discontent. Clueless homeowners stumbling around without information cannot possibly manage HOA business properly. When they ultimately fail in proper budgeting and maintenance, guess who gets blamed? That *&#%$@ developer! (Hear the lawyers warming up?)

Here are some practical ways for developers to avoid attending the Tar & Feather Ball:

Maintain Separate HOA Bank Account. Once the developer starts collecting regular assessments from new owners, that money should go into an HOA bank account that can be properly audited by a CPA. The owners are entitled to know that all assessments were properly collected and spent. If the developer commingles money in other accounts, audit is difficult or impossible and raises big suspicion.

Include Owners on the Developer Board. While the developer has the right to maintain control of the board until transition, it’s simply good business to have one or more owners on the board to give an appearance of openness.

Include Owners on Committees. During the development stage, there are a variety of meaningful committees that will help get owners invested and informed: Architectural Control, Landscaping, Maintenance and Budget Committees can have ongoing input with the developer in constructive ways.

Provide Regular Newsletters. Depending on the HOA size, a monthly or quarterly newsletter is invaluable in keeping current owners informed about the number of sales, status of amenity construction, timing of transition, introduction to new neighbors and reminding of common issues like pets and parking. The newsletter doesn’t need to be extravagant or lengthy, just informative. (For more, see Newsletter Basics)

HOA Website. A website is a tremendous way to market new homes. If one is built for the HOA (like www.nottacarecondo.org), it can have a section dedicated to HOA information for prospective and existing owners like the Operating Budget, Reserve Budget, Governing Documents, Newsletters and Rules & Regulations. (For a comprehensive list of information to post, see HOA Websites). Once the sales phase is complete, the website can be turned over to the HOA from the developer. It’s one of the most useful tools an HOA board can have in its arsenal.

The Six Month Plan. Transition Meeting planning should start six months in advance.

Six Months Out. A Transition Committee of homeowners should be assembled. The developer can handpick these individuals based on experience and compatibility (with each other and the developer). The goal should be to select folks that would make good board members, not ones carrying a personal agenda to get the developer. The Transition Committee should meet at least monthly to gain information and an understanding of HOA business. The developer should be forthcoming with that information as much as practical. This is the perfect time to cultivate trust. Withholding information breeds suspicion.

Three Months Out. Schedule the Transition Meeting at a location that is convenient to the HOA and large enough to hold every owner. If the community doesn’t have a large clubhouse or rec room, rent a nearby school, church or community center. Midweek (Tuesday-Thursday) 6:30 -7:30 pm generally works well.

Two Months Out. Make personal calls to prospective board members (start with the Transition Committee) and get a commitment to serve. This is the developer’s best opportunity to assemble a friendly board. Don’t waste it.

One Month Out. Send a formal notice of the Transition Meeting along with a slate of Board candidates and a proxy form for each owner to fill out and return in a post paid return envelope. The proxy ensures you have the quorum necessary to conduct a legal meeting. (see Forms for a sample Proxy). During that month, assemble the information required by state statute to turn over to the homeowners (see Developer Issues for a handy checklist).

Transition Day. Show up to the Transition Meeting with a big smile and all the applicable information indicated on our checklist. (Don’t leave loose ends). In your opening comments, remind attendees that individual warranty issues will be addressed but not at this meeting. Stay tracked on the transition purpose of the meeting. Answer questions and be brief. If you don’t know the answer, admit it and offer to find out. Keep your word. This is a testing time by the homeowners. Sincerity is easy to detect. So is BS. Strive to invoke a sense of trust with the group. Keep the meeting brief, no more than an hour.

After comments and Q&A, the primary item of business is to elect the new board. Since all the candidates are already lined up (you did do this ahead of time, right? Review Two Months Out above) the election should be by acclamation (read "slamdunk"). When the election is complete, the new board selects officers. The developer should promise to be available to assist the new board during the first six months after transition and keep your word.

A tripless transition will build enormous credibility for a developer and help diffuse potential legal challenges that can crop up when loose ends are not firmly tied. With careful advance planning, the developer will cultivate a higher level of trust with the community members. People that trust each other are much less likely to sue one another. That’s a good thing for everyone but the attorneys, right? BACK

Means & Mechanism
There’s trouble a’ brewin’ in HOA Developer City. Betwixt and between land acquisition, zoning issues, project cost estimating, construction financing, building permits, project scheduling, marketing and a myriad of other details is wedged the HOA. For the HOA, the developer is required to file certain information with the state to qualify the project as a homeowner association. While the required information varies from state to state, the governing documents, budgets and homeowner fee details are always required in the Public Offering Statement to prospective buyers.

Even for the most diligent and well meaning HOA developer, there is an inherent conflict of interest in the process. The developer’s profit motive always conflicts with the long range interests of the homeowners association. Lenders have a nasty requirement of adding the homeowner fees (aka dues) to the proposed loan payment when qualifying borrowers. This same requirement is not made of single family home purchasers yet that requirement increases the loan payment 10-20% for HOA buyers and makes it more difficult for them to qualify. To counter this, some HOA developers are forced to lower prices to help qualify buyers. But there is another way. Lowering the homeowner fee can produce the same result without impacting the developer’s profit margin.

One of the HOA developer’s favorite ways of reducing costs to buyers is to reduce reserve funding. (Reserves deal with repairs and replacements like roofing, painting, paving, etc.) The money that should be set aside for reserves can be easily reduced by failing to include some or all of the components, using inaccurate measurements or false cost information. Since most states do not scrutinize the homeowner fee for adequacy, it’s an easy deception for a developer to pull off.

Another way of reducing the homeowner fee is to reduce the Operating Budget by eliminating "unnecessary" expenses like management, bookkeeping and various repair services. Insurance is another easy area to cut costs by leaving out important coverages like Directors & Officers Liability, Employee Dishonesty, Guaranteed Replace Cost or having a higher than prudent deductible. Reducing the Operating or Reserve Budget to help buyers qualify for bigger loans will result in higher profits for the developer at the expense of the HOA’s ability to fund operations.

Another developer conflict of interest involves time. The developer’s plan is to sell the product as quickly as possible and maximize profit. The developer has a one year repair warranty which must be honored. But beyond that, the financial responsibility is limited unless a clever lawyer proves otherwise in court. But clever developers often protect themselves from court judgments by using a Limited Liability Corporation or bankruptcy.

Since an HOA developer’s primary motive is profit, the long term welfare of the HOA is secondary. But developers that want to stay in business know they must provide for the future welfare of the HOA. To help overcome the natural conflicts of interest, the HOA Operating and Reserve Budgets should be outsourced to a HOA consultant that is knowledgeable in HOA operations and costs. Using an outside expert will produce the accurate costs and put the developer arms length from the numbers.

When preparing a Reserve Study, the developer’s construction costs will be adjusted to reflect what the HOA will pay. For example, painting an occupied and landscaped building is at least 30% more expensive than painting the same building under construction. Projects like roofing, fences and decks need to include the cost of removal of the old installation which will often increase the total cost 20-40%. When the budgets are calculated with the HOA’s interests in mind only increases the homeowner fee by 5-10%. This small change is unlikely to be a deal breaker and gives the developer an important hedge against lawsuits.

While having enough money to operate is very important, having a clear understanding how and when to spend the money is equally important. For this, a Maintenance Plan provides the details to direct the HOA. The Maintenance Plan should include all regular and cyclical tasks that need to be performed to keep the assets in top shape. Whether it’s gutter cleaning, tree pruning or landscape maintenance, roof replacement or painting, a properly detailed Plan gives clear and timely direction to the Board.

Pop Quiz: When the HOA has neither a plan or money to maintain the assets, guess who gets blamed for the problems? (Okay. Time’s up.) The developer that provides the proper means and mechanism for success will not have to worry about the answer to this quiz. BACK

Better Builder Budgets
Long before ground is broken, the HOA developer is faced with a variety of decisions over building and landscaping styles, materials and systems. While price point and marketing considerations play a heavy hand in those decisions, an aspect oft overlooked is the HOA Factor. The HOA Factor is the maintenance and costs required to run the HOA operation after turnover.

Careful consideration of the HOA Factor benefits both the developer and the HOA. If the developer considers the long range impact of construction decisions, homeowner fees can be significantly reduced. Lower fees means buyers can qualify for bigger loans. Bigger loans mean bigger profit.

Consider some of the alternatives available that can make this dream a reality:

Building Components
Compact Fluorescent Lighting Fixtures. These jewels provide a variety of benefits: higher light levels for security, reduced energy consumption to save electricity and last 10 times longer than incandescent bulbs thereby reducing labor costs.

Roofing. 40 and 50 year shingles are now available for little more cost than 25 year products. Extending the useful life by 60-100% drastically reduces reserve requirements on one of the HOA’s biggest expenses.

Pool & Spa Equipment.

Automatic Chlorinator. A great improvement for stabilizing the pool chemistry and reducing labor costs.
Solar Blanket. Reduce heating costs up to 25%.
Solar Heating Panels. In sun friendly states, solar panels can reduce heating costs 50-75% and pay back their investment within a few years.
System Computer. Permits automatic adjustments otherwise required by hand. One year payback. Extends useful life of pool and its components.

Paint Color Selection. While darker designer colors are tempting to the marketing folks, light colors reflect heat and are less prone to fading and cracking, extend the repaint cycle and reduce reserve costs.

Siding Selection. There are many choices of siding. But two, cementaceous (like Hardiplank) and vinyl afford some great cost and maintenance advantages. Both have a 50 year manufacturer’s warranty. Cementaceous siding holds paint better and longer and is fireproof. Vinyl requires no paint at all and eliminates the most frequent and expensive repair an HOA generally faces. Both come in a variety of architecture styles which, when creatively used, will enhance market values.

Playground Equipment. New generation equipment offering powder coated steel construction in attractive colors offer low maintenance, greater safety and longer life.

Sprinkler System with Rain Override. Ever drive by a property in a driving rain only to see the sprinkler system faithfully chugging away? The inexpensive addition of a rain override device ensures water is not be wasted.

Deck Materials. The average wood deck lasts 15-20 years. Competitive priced recycled material like Trex Deck has a reputed 50 year life and requires neither sealing, stain or paint.

Fencing Selection. If the main objective for fencing is privacy and curb appeal, vinyl fence offers both in a 50 year life product for less money than a wood fence.

Landscaping Components
Native Species. When designing the landscape lay-out, insist on using disease and drought tolerant native species. They will last longer and save on water.

Xeriscaping. This landscape design technique reduces water needs by careful selection of plants and construction design.

Reduce Turf Area. Grass looks nice but is maintenance and water intensive. Limiting the area is a budget bonus.

Signage. Rather than wood signage, consider a sandblasted rock monument. The pricing is competitive, it lasts forever and won’t get stolen.

Cost & Maintenance Management
Operating Budget. Rather than cobble together some numbers, have your budget done by an experienced HOA manager who isn’t bidding the management contract. The line items will reflect reality.

Reserve Plan. A Reserve Plan (or Study) is the most important long range planning tool there is. It considers all the periodic repairs and replacements the HOA will be faced with over, usually, the next 30 years. It is an indispensable roadmap for the Board to follow and provides a funding plan so money can be accumulated systematically. If the developer chooses building and landscaping components according to these recommendations, owner contributions will be substantially reduced.

Maintenance Plan. Knowing how and when to repair or replace something is just as critical as to know what components to include. A good maintenance plan instructs on both regular operating maintenance and reserve repairs and replacements.

Besides excelling at sticks and bricks, developers that hone their HOA budget and maintenance skills will increase their profit margin and client satisfaction. Make money and make happy? Who woulda thunk it? BACK