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Developer Articles |
Right from the Start With current lifestyles, it’s clear that homeowner associations will be an ever present and ever growing segment of the housing market. While the objective of homeowner association developers is to fill projects with happy owners, this does not always happen. The primary reason is not always the quality of the construction...but the quality of the homeowner association governing system. Governance under the best of circumstances is complex and made even more so when it involves neighbors governing neighbors. If the developer pays little attention to the details of the governing system described in the HOA governing documents, transitioning to a board of homeowners will often harvest unhappy or frustrated people looking for a financial piece of the developer. Fortunately, there is a better way. Homeowner association developments go through three phases: the interim phase, the transfer phase and the ongoing governance phase. The most critical of these is the interim phase as it sets the tone for the future. The interim phase covers the time when owners occupy a development while still under control of the developer. There is a board of directors, however, it is made up of the developer’s representatives so owners have little power. There can be clashes because the developer, whose interests are short term, makes decisions that impact the owners, whose interests are long term. Developers have a variety of control styles. One may be an autocrat, calling all the shots and failing to organize the owners. Another, where sales are brisk, exercises minimal authority and turns control over to the owners prematurely, leaving inexperienced owners to fend for themselves. Transition Committee. The wise developer integrates interested owners early on. Forming a transition committee long before actual turnover provides several advantages to a developer. The developer has total control over the members of the committee and can select those that are reasonable, less contentious and self-serving. Being part of a Transition Committee is a good training ground for future board members. The Committee can also make valuable budgetary, construction, landscaping and policy recommendations to the developer that will be in both parties’ best interests. The Committee can also serve as a buffer between the developer and owners answering homeowner association operation related questions. Proper Budgeting. One developer versus owner issue that is particularly sensitive involves budget and reserve funding. The developer’s short term interests to minimize personal costs and keep homeowner fees low to promote sales may set up the future HOA for budgetary shortfalls and special assessments. This stumbling block often comes back to haunt the developer. If structures are not adequately maintained due to inadequate funding, the deterioration may be construed to be a construction defect...and a developer’s responsibility. If the developer initially establishes reasonable budgets and reserves, the new homeowner association will (or should) be more proactive in maintaining the property. This is obviously in the developer’s best interest. To achieve realistic budgets, it’s best to use outside consultants experienced in HOA operations. This puts the developer arms length from the outcome. Value Engineering. One concept that directly affects homeowner fees involves "value engineering". Since the HOA must maintain common elements and those elements may be extensive and expensive to maintain, careful selection of design and materials can often reduce those costs by 20-50%. These decisions, obviously, must be made in the concept stage. When they are made, they often also reduce actual construction costs so both developer and homeowners win. Turnover/Transition Meeting. This event marks the formal change in authority from the developer to the homeowners. It is an event that should be carefully choreographed. Besides thoughtful scheduling, site selection and adequate notice, the event itself should be the basis for long term trust between the developer and homeowners. Several things take place at the meeting: The developer should physically turn over all HOA records (for a comprehensive list, see Regenesis.net "Developer" section) which includes a clear and auditable accounting of HOA monies. HOA related questions posed by homeowners should receive clear and informed answers. Since the developer is rarely experienced in HOA governance, it’s best to have a professional HOA manager, consultant or attorney present to handle this part of the meeting. Election of directors. The tone of the Turnover Meeting should be cordial, respectful, informative and short. The whole process, including the election of directors to the board, should take no more than an hour. At meeting closing, the developer should express sincere willingness to work with the board for some months afterwards on related issues. That willingness should be real. In the beginning, take the time to build a firm and lasting foundation by uniting the developer and new homeowners as allies. The wise homeowner association developer knows that the governing structure should be as sound as the building structure. This is a firm foundation that will stand. BACK
Apple Pie Turnover The trigger for turnover is normally found in the governing documents and is usually tied to a certain number or percentage of lots, homes or units sold. If sales are drawn out over years, there is often a time limit for turnover so that the developer can’t hang on forever. Since the trigger can vary, read the governing documents first. If it’s not there, state HOA statutes may provide a default provision. The developer can also opt to hold turnover early. Once the turnover process begins, it generally takes several months to accomplish properly. Legal notices must be sent, planning meetings held, financial accounts reconciled, documents and information gathered. To do this properly takes time. Move slowly but deliberately forward. Many governing documents call for a Transition Committee. This committee is usually appointed by the developer (who is the president of the HOA board until turnover) for the purpose of grooming candidates for future board positions. Holding several committee meetings during the turnover period is very productive toward orienting and educating. The committee should be provided and understand the Operating Budget and Reserve Study and brought up to speed about ongoing contracts like sweeping, janitorial, pool, management and landscaping. The Management Dynamic. One important board authority is management. It comes in two flavors: self and professional. From a distance, self management may seem to be a viable option. However, if a paid manager isn’t getting things done, it’s up to the Board members to do it for nothing. This almost always turns out to be a short term phenomena once the Board realizes how contentious rule enforcement and money collection can be. So for all but the smallest HOAs, professional management is the way to go to make sure things get done quickly and properly with a minimum of disruption for directors. Getting the Records. For the Board to do its business, it needs certain records to refer to. Some of this information is permanent, like the governing documents, while other is changeable, like the landscape contract. Here’s a list of documents and information the Transition Committee and the new Board should be provided by the developer: 1. Governing
Documents (Articles of Incorporation, Declaration, Bylaws, Rules, Regulations
and Resolutions) Besides holding elections and transferring records, the goal should be to stay focused on HOA business. It’s helpful to have someone that is experienced in HOA governance, like a professional property manager, attorney or consultant, present to answer questions and concerns. Some owners may attend to talk about home warranty issues. These should be deflected to another time and place with a promise to deal with each and every one appropriately. The Turnover Meeting itself should be as short as possible. While light beverages and refreshments are always welcome, steer clear of alcohol, especially before or during the meeting. Stick to the agenda to get elections done, transfer information and get outta Dodge. If the developer isn’t comfortable running a meeting, someone experienced in that should do it. One hour is generally enough to complete what must be done. Follow Up. The developer or an informed representative should attend several Board meetings during the months following the Turnover Meeting. The idea is to help keep the Board focused on HOA organization issues and keep them from dwelling on discontent with the developer. The developer can and should intercept and cure any legitimate concerns rather than let them fester into litigation. This is a great opportunity to right wrongs and foster good feelings with the Board. Developers that overlook this opportunity often live to regret it. Turnovers should be sweet and satisfying just like the mouth watering baked goods of the same name. The wise developer plans, is cordial, patient and leaves the HOA turnover in apple pie order. BACK
Developing a Successful HOA The growth of HOAs has been nothing short of phenomenal in the last decade. In many urban areas, upwards of 75% of all new residential housing is in the form of a homeowner association. Mixed used HOAs combine residential and commercial together. For instance, retail and office units often occupy street level space while residential units occupy upper floors. HOAs are essentially governmental corporations controlled by the members through an elected board of directors. The HOA has authority to make and enforce rules and regulations and to collect HOA fees from the members to support the HOA operation and maintenance responsibilities. Like the IRS, the HOA has significant power to enforce its will through liens and, in extreme cases, foreclosure. When homeowner associations are properly conceived and constructed, they work very well. When they are haphazardly implemented, trouble and discontent follows. The success or failure of an HOA begins at the beginning...with the developer. Knowing the huge potential in HOA development, what should the savvy HOA developer do to maximize sales and profits? I will explain several steps to being a successful homeowner association developer. 1. Choose the HOA’s design and material carefully. Homeowner associations often have significant maintenance, repair and replacement responsibilities. This is particularly true of condominiums where the structures and grounds are the maintenance responsibility of the HOA. This responsibility falls on the shoulders of a volunteer board of directors which is usually composed of well meaning but inexperienced people. So, when it comes to designing the structure and grounds, ease of maintenance and cost of repairs are extremely important. Steer clear of unproven designs and materials with little or no warranty. The odds are high that such an experiment will fail and problems come back to haunt the developer. The more complex and expensive it is for the HOA to maintain, the more likely it will not be done properly. 2. Carefully craft the governing documents. Also called CC&Rs (Covenants, Conditions and Restrictions), rules, regulations, declaration and bylaws, these documents form what is the HOA governmental structure. State laws vary on the requirements so it’s imperative that these documents be crafted by a knowledgeable and experienced attorney in the state where the development is going to be. There is no such thing as "boilerplate" governing documents. Each HOA is unique and state laws change frequently. Never try to save money on legal costs, because poorly written governing documents can make it next to impossible for the board to administer HOA business, enforce reasonable rules or raise the money needed to maintain the assets. 3. Budget the HOA adequately. In an attempt to be competitive in selling their HOA units, some developers set the HOA fees unrealistically low. If the competition is charging, say, $300 a month, they might charge $250. That’s a better deal right? Hardly. If it takes $300 per month per unit to support the HOA budget, it won’t take long for the new board of directors to figure that out and then Mr. Developer receives a strongly worded letter from an attorney that has ugly words like misrepresentation and fraud sprinkled here and there. Whether the developer has intentionally or unintentionally underestimated the HOA budget, he will be held accountable. Moreover, if the HOA doesn’t have enough money to maintain the assets, it will fail sooner and the developer usually gets blamed for construction defects. It’s best to use third-party consultants, including professional HOA managers, CPAs and management consultants that specialize in homeowner associations to determine the HOA’s operating and reserve budgets. The developer should get as arm’s length as possible from the budget numbers. 4. Provide a reserve study. A reserve study forecasts the repair and replacement events that the HOA will encounter over the next thirty years. It identifies the common elements by component (roof, paint, siding, etc.), assigns a repair or replacement cost to each, a schedule for each (like roof, thirty years; paint, ten years.), and a funding plan that guides the board of directors on how much money to reserve each year for these future events. Since these costs can easily add up into the millions of dollars, it’s critical that they be included into the HOA budget from the beginning. Then, it’s a relatively simple matter to collect the money each month from each owner, deposit it into a reserve account, and spend it on the indicated repairs and replacements as they happen. The HOAs that have and follow such a plan are well maintained, the owners enjoy high resale value and the community is livable and desirable. 5. Provide a maintenance plan. While adequate budgets can pay for adequate maintenance, how the money is spent is very important. Remember, the board is made up of amateurs that often don’t have the knowledge or experience to maintain the millions of dollars in assets with which they are entrusted. A maintenance plan written by the developer gets into the specifics of what should be done, who should do it, and when. The plan should be written in layman’s terms because that’s what the board members are. They need to understand what needs to be done but will not actually do it themselves. A maintenance plan that ties directly to the operating budget and reserve study will give the board the guidance it needs to spend the HOA’s money properly. 5. Honor warranty obligations. Developers generally have a statutory warranty period on HOA property sold. Handling warranty claims properly and quickly yields big dividends in the public relations department. It’s best to have someone specifically assigned to this task since it takes a high degree of organization that average contractors don’t have. Besides being the right thing to do, honoring warranty obligations produces goodwill that will be invaluable in the future dealings that may be confrontational. A happy history eases future fights. 6. Stay in the mix. Just because the project is sold out and turned over to the homeowners doesn’t mean the developer’s job is over. Beyond warranty issues, there is always a potential that some legal claim may raise its ugly head. To help fend off these dragons, the developer should retain the right in the governing documents to attend future board meetings and receive copies of board meeting minutes. Proactive developers take those rights seriously and attend all meetings for years. The result is that small problems are nipped in the bud before they become subjects of litigation. Being an HOA developer can be highly rewarding and profitable when the plan includes these insider principles. Take this advice to heart and enjoy hearty results. This article appears in Donald Trump’s book The Best Real Estate Advice I Ever Received. BACK |
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