Developer Articles
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Before Turnover   A developer controlled board has the same duties and requirements as an owner controlled board. While the developer is still in control, a transition homeowner board or committee should request all the financial records that detail the actual association maintenance fees collected, the reserve plan and funds, and the actual costs of performing association services like landscape maintenance, pool maintenance, property management and accounting. Make sure that the developer has not commingled construction expenses with the association budget. A full audit of these finances is usually in order to ensure that all revenue and expenses are accounted for. A CPA knowledgeable can assist in this process.

Keep Business Arm’s Length    Owners need to be careful about serving on an owner advisory committee for the developer-controlled board. The developer may only be trying to insulate himself from future liability. Further, an advisory committee lacks the authority to make management decisions. If the developer truly wants the owners to manage the Association, a turnover meeting should be scheduled and an owner board elected. If the developer is unwilling to take this step until required to do so, an advisory committee could be counter productive to homeowner interests.

Get Smart  Know your rights during turnover. State law requires that a turnover meeting must occur within a certain time period after developer conveyance of a certain percentage of the units, or the elapse of a certain time period after declaration recording, whichever is earlier. Owners need to know what they are entitled to receive at the turnover, and that they act to protect their rights. Check your own state statutes for the specific requirements. For example, in Oregon, condominium associations are entitled to the following at the turnover meeting:

1. The developer relinquishes administrative control to the owners
2. The owners elect a board of directors in accordance with the bylaws
3. The developer delivers to the association at the turnover meeting, if applicable:
a. Copy of the recorded declaration and bylaws plus any supplements and amendments.
b. Copy of the articles of incorporation.
c. Minute books and other records of the association.
d. Rules and regulations which have been generated
e. Resignations of any directors due to expiration of developer control
f. Financial report for the association: balance sheet plus income & expense statement for the preceding year
g. Balance of association funds or control of them including bank signature cards
h. All association personal property including an inventory
I. Copy of the following, if available:
   ~ As-built architectural, structural, engineering, mechanical, electrical and plumbing plans.
   ~ The original specifications indicating all material changes.
   ~ Plans for underground site service, site grading, drainage and landscaping
   ~ Any other information relating to repair or maintenance of the property.
j. Insurance policies.
k. Copies of any occupancy permits which have been issued
l. Other permits issued issued within one year prior to the turnover date
m. List of the contractors involved in the construction or installation of plumbing, electrical, mechanical and structural components of the common elements.
n. Roster of owners, addresses and telephone numbers, if known
o. Leases of the common elements and any other leases to which the association is a party.
p. Employment, service contracts or other contracts in which the association is one of the contracting parties

Developer Follow Up  In order to facilitate an orderly transition, the developer or an informed representative is required to attend up to three meetings with the board of directors during the three months following the turnover meeting.

Construction Defects The statute of limitations provides for a deadline for bringing legal action for construction defects. If the new board does not press the developer to correct any such defects, then the Association will have to pay the cost of correction. This issue should be addressed without delay. Construction defects are not always plainly visible so it is prudent to get a property inspection done by a qualified architect or engineer who will generate a detailed property condition report. If the report shows significant defects, the Association should protect its rights by contacting a knowledgeable attorney.

Identify Professional Advisors The board is not expected to be knowledgeable in technical areas like management, accounting, investment and law. Some of these functions may be handled through your professional property management company if you have one. However, since the vast majority of community associations are self managed, it is very important to identify knowledgeable advisors to counsel the board.

Turnover is a pivotal moment in the future of each community association. Treat it with respect and take the time to do things right. What happens today, sets the stage for tomorrow. Make sure this play has a long successful run.   BACK

Crucial First Steps for a Homeowners Association
What takes place during the first months of a new homeowner association will set the tone for its future. If the newly-formed board's first actions are not taken intelligently, its members may find themselves liable for losses and exposed to trouble that can plague an association throughout its life. Inexperienced board members would be well-advised to follow a few simple procedures that will set the homeowner association on secure ground and head-off problems before they happen.

1. Retain Legal Counsel. The board should hire its own independent legal counsel as soon as it assumes control of the association. The attorney selected should be experienced in homeowner association law, practice and transition claims, spotting potential claims and knowledgeable about statutes of limitations that may apply to any possible claims.

2. Collect Relevant Documents. Complete sets of the association's governing documents, project specifications, the developer's marketing materials, financial records and all association correspondence should be collected immediately. It is in these documents that the duties and responsibilities of the association are spelled out.

3. Have the Property Inspected.  The first homeowner-elected board is also responsible for discovery of any structural or maintenance defects of the common elements of the property. An independent inspector - preferably an architect or engineer - should evaluate the physical condition of the property. Legal counsel should review the report to determine whether any warranty claims may be asserted against the developer’s statutory, contractual or implied legal obligations.

4. Hire an HOA Management Company. A property management firm specializing in homeowners association can be critical to the long term success of the association. It will be of invaluable assistance to the transition board.

5. Audit the Books.  After taking control the board should hire an independent accountant to audit the association's books kept by the developer.  It's essential to determine, at minimum, that the developer has paid all required capital assessments and reserve contributions.

6. Review the Budget.  The developer’s budget should be inspected by the accountant and the association's management firm to ascertain whether or not the budget is adequate. Any possible claims against the developer should be asserted immediately to improve the chances of proving or collecting them.

By following these basic first steps, a new board can best protect the association interests and set the stage for sound future board decisions.  BACK

In the Beginning...
The land was void and lacking development. The developer said, "I shall fill the land with many dwellings and they shall be called condos, townhouses and planned communities. I shall populate the dwellings with numerous homeowners and I will reap great profit from so doing.  When my work is complete, they shall govern themselves in an honorable and forthright manner. And it will be good..."

With current lifestyles, it’s clear that community associations will be an ever growing segment of the housing market. While the objective of every community association developer is to fill projects with happy owners, this often does not happen. The primary reason is not the quality of the construction...but the quality of the association governing system.

Self governance is complex and assuming that owners will naturally succeed goes contrary to the evidence. Even ordered things break down and chaos will not result in order. Those developers that plant a poor governing structure will harvest unhappy owners looking for relief from the developer...a circle of strife. Fortunately, there is a better way.

Community association developments, whether new construction or apartment conversions 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 or no real 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.

The wise developer integrates interested owners early on.. Temporary or "ad hoc" committees working with a knowledgeable developer or management agent become educated on procedures. This participation prepares those that are interested for roles on the board. The committees also make valuable budgetary, construction, landscaping and policy recommendations to the developer that will be in both parties’ best interests. The committees also serve as buffers between the developer and owners answering owner questions that don’t require a developer response.

One developer vs. owner issue that is particularly sensitive involves budget and reserve funding. The developer’s short term interests to minimize personal costs and keep monthly fees low to promote sales may set up the future association for budgetary shortfalls and special assessments. This stumbling block can come back to haunt the developer. If structures are not adequately maintained due to inadequate funding, the deterioration may be construed to be a con-struction defect...a developer’s responsibility. If the developer initially establishes reasonable budgets and reserves, the new association will be more proactive in maintaining the property. This is obviously in the developer’s best interest.

Another interim phase concept that can be developed is a transition board of directors. In this scenario, the developer appoints several owners to the developer board while still controlling the majority. This allows key owners to become educated as to board procedures and give other owners a more vocal position with the developer.

In the beginning...take the time to build a firm and lasting foundation by uniting the developer and new homeowners as allies. The wise community association developer knows that the governing structure should be as sound as the building structure. This is a firm foundation that will stand.

For more on this topic, see the article "In Transition" and for a real development success story, read Genesis 1:1-2:2.  BACK

In Transition
Transition in a newly developed community association can happen two ways, gradually or quickly. The wise developer integrates interested homeowners gradually. A homeowner transition committee can step-by-step become familiar with the governing documents, budgets, architectural restrictions and other critical aspects of running their association. Such a committee is often composed of folks that will ultimately run for and be elected to board positions at the turnover meeting. By turnover time, all candidates should be well informed and comfortable with the issues.

Some developers opt for a quick transition with little or no advance integration of homeowners into the management role. This method essentially turns the reins over to a well meaning but uninformed board of homeowners after a period of ironclad control by the developer. With little understanding or information, the first elected Board of Directors are more likely to fumble their basic duties. If there is anything a developer doesn’t need, it’s another reason for customers to be disgruntled. Obviously, the gradual approach is in both parties’ best interests.

The turnover meeting usually happens after a prescribed number of the units have been sold, often 75% of the total. (The governing documents reveal the magic number). Sometimes a time limit, like 3 years after sale of the first unit, triggers the turnover meeting event. The turnover meeting marks when legal control of the association is transferred from the developer to the homeowners. At this meeting, owners are elected to a Board of Directors which appoints the positions of, typically, President/Chairman, Vice President/Chairman, Treasurer and Secretary. This event also marks the time when the developer turns over financial records like a detail of all assessments collected, delinquencies and association expenses incurred under the developer’s control. Other pertinent records that should be turned over include "as built" blueprints of common area structures and grounds, copies of warranties and association related correspondence.

To confirm the financial records received, the new Board should get a certified audit performed by a CPA. If there are any discrepancies, it’s better to find out and deal with them as soon as possible. If your association has chosen to be self managed, the CPA can also recommend a system for financial record keeping that will be user friendly.

Another budget item to focus on is reserves. Reserves for major repairs and replacements are commonly under funded or ignored in new homeowner associations. This is a critical time to have a reserve study and funding plan done. The funding plan will ensure that all owners, now and in the future, will pay a fair share of the reserves. Sound reserves reflect a progressive maintenance philosophy and increase market values. Mortgage lenders look carefully at the level of reserves when evaluating loans. If the association doesn’t have a professional property manager to perform the reserve study, there are consultants available.

Insurance is another area of critical importance. Seek out the expertise of an agent that specializes in condominium and homeowner association insurance and get recommendations on coverage options, levels of coverage and deductible options (a higher deductible can often produce almost a dollar for dollar savings in premium). Now is also the time to establish a clear policy on association versus homeowner insurance responsibility. Using the governing documents as a guide, establish a written policy statement of what the association will or won’t insure and distribute to all new homeowners. Each homeowners, in turn, should provide a copy of this statement to their own insurance agent so there is no misunderstanding what is being insured. This is particularly important in common wall communities like condominiums where claims can arise due to fires and floods originating from neighboring units. The association needs to be careful not to accept insurance responsibility for insurable events where the association has no maintenance responsibility. These claims should normally be referred to the affected owners’ insurances. If the association were to accept all claims, soon the resulting increase in premium or outright cancellation would make insurance unattainable.

Select an attorney specializing in condominium and homeowner association law that you can call on before crisis strikes. "Real estate" attorneys are not necessarily qualified so inquire about an attorney’s specific homeowner association experience. The developer’s attorney, while possibly qualified, has a conflict of interest but should be willing to make a referral. Also check with the state bar association.

Now is the time to weigh the merits of self versus professional management. The financial capability and lifestyles of residents may warrant professional management even in small associations. Be aware that property managers, like attorneys, specialize in homeowner association management and there are relatively few experts. Ask for references. When interviewing, develop specifications ahead of time and make it clear what you are willing to pay for. That way, proposals can be fairly compared.

If you decide to self manage, remember that managing a homeowner association is a 24 hour a day, 365 day a year job...at least the key people need that kind of availability. Make sure the Board is committed to the time it takes to self manage. Over commitment causes "burn out" which leads to "drop out" and lack of continuity, the greatest pitfalls of self management. To guard against burn out, the board should do careful long range planning to minimize stress and make the job enjoyable.

A consistent communication system between the Board, owners and manager is the glue that holds a successful association together. It allows a free flowing interaction for problem solving and trust. Timely delivery of financial reports, meeting minutes and newsletters are the foundation for success. Proactive communications keep owners informed even when you think they aren’t interested. (They are).

So now you’re out of the transition and off and running as a new homeowner association. Treat it like a cherished possession. That’s what "fiduciary" responsibility is all about. If you do, harmony will reign in your community and you, the Board, will be held in high esteem.  BACK

Transitional Success
Transition from developer to homeowner control should be a carefully planned process. The earlier owners get involved in the process, the better. Unfortunately, many developers maintain total control until the required number of sales triggers a transition meeting that is hastily conceived and executed. This approach guarantees that much of the necessary information the new homeowners need will be overlooked.

As a precaution, a pre-transition committee should be established by homeowners to get up to speed on critical components of homeowner association business. If the size and number of volunteers warrant it, the following issues can be assigned to separate committees. Otherwise, a transition committee should make sure each one is included.

Management Items to consider:

• Review the association's governing documents.
• Review association's files, books and records.
• Review potential management contracts.
• Review existing and potential service provider contracts.

Architectural & Design Items to consider.    Maintaining architectural standards are critical since they directly impact market values if let slide. There is a conflict of interest between the developer and the homeowners. Developers often impose minimal architectural restrictions to encourage sales. The homeowner association’s long term interests are to maintain market value of the homes. The way to do that is to formulate a comprehensive policy. Items to consider:

• Review the governing documents relative to the authority for making rules and regulations.
• Review the existing policies, procedures, rules and regulations established by the developer.
• Devise new rules, regulations, standards and enforcement procedures as needed.

Finance Items to consider:

• Review the association's reserve fund status. If inadequate or unavailable, arrange for a comprehensive reserve study and funding plan so that the association gets started off right.
• Adopt a Collection Policy collection of assessments.
• Retain a CPA prior to turnover to perform an audit of the books. Since it is the developer’s responsibility to turn over accurate records, it is reasonable to request he pay or share this expense.

Maintenance Items to consider:

• Review the governing documents to determine the association’s maintenance responsibilities.
• Schedule a final walkthrough inspection with the developer to establish a punchlist of repairs and corrections.
• Obtain copies of all plats, plans and "as-built" drawings for the common area.
• Obtain copies of all guarantees, warranties and bonds provided by the developer, the builder, subcontractors and any vendors of materials or products used in development of the project.
• Hire a structural engineer to review the buildings, plats, plans, engineering drawings and acceptable building standards and codes.

Insurance Items to consider:

• Review the governing documents to determine what insurance coverage is mandated
• Confer with several knowledgeable insurance agents about recommended coverages
• Once a slate of coverages is determined, solicit competitive proposals
• Purchase Directors & Officers Liability Insurance effective with turned over to the homeowners.

Transition success requires advance planning. There is simply too much to consider and too much at stake to treat it lightly. There are long term consequences for what, or what doesn’t, take place at this pivotal point in time. Remember that the developer’s interests are short term while the homeowners’ interest are long term so the developer may need some prodding. Starting early will help both parties to do the right thing. If you are pre-transition and haven’t gotten the ball rolling, roll on!     BACK

Avoiding Developer Tiger Traps
Homeowner association developers sometimes trip and fall into avoidable "tiger traps". Besides the usual hassles of land use requirements, building inspections, contractor scheduling, quality control and construction financing, there is also a critical component called "transition from the developer to a homeowner controlled board" that too often proves to be full of pit falls for developers. Here’s what often takes place:

The new homeowner Board is usually comprised of well meaning volunteers that want to do a good job but have little experience in managing homeowner associations. Add to this their general lack of information and the developer’s unwillingness or inability to help. Predictably, confusion and suspicion leads to confrontation with the developer. And confrontation too often leads to lawyer jousting. Gadzooks!

So, how can a developer avoid these unsavory results? Here’s a few suggestions:

Use Management Consultants Much grief can be avoided by using a knowledgeable homeowner association management consultant from the get-go. For example, management consultants craft real life budgets that take into consideration normal operations and long term reserve needs. Consultants also advise developers on ways to reduce monthly assessments by using different materials or finishes in the construction. Lower assessments make the homes more saleable and at a higher price.

Reduce Conflict of Interest By using an outside consultant, the developer avoids an inherent conflict of interest that comes from a desire to keep assessments low to make sale prices more attractive.

Use Attorney Specialists Like most areas of law, homeowner association law is a specialty. Typically, there are only a handful of attorneys that are actively engaged in it. "Real Estate" law doesn’t cut it. And some specialize on developer issues, while others don’t. See your State Bar Association for referrals.

Don’t Plagiarize Governing Documents Never use governing documents from another project assuming they are all "boiler plate". Like fingerprints, each homeowner association property is unique and locality requirements vary. State statutes change frequently as well. This demands a specialist attorney to draft original documents that conform to current statutes.

Avoid High Maintenance Materials If the association has significant exterior maintenance responsibilities, there are ways to reduce ongoing maintenance, repair and replacement costs and reduce assessments:

~ Consider vinyl siding to eliminate need for expensive cyclical painting.

~ Substitute architectural composition shingles for cedar shakes. They are much cheaper, have a longer life and much lower maintenance cost.

~ Avoid using cedar shingle siding. Again, high maintenance and short life.

~ Avoid synthetic stucco (EIFS -Exterior Insulation Finishing System) like the plague. While it looks great, it has a long history of promoting accelerated dryrot and structural problems. For more on this, see The EIFS Institute

~ Decks are notoriously poorly built and cause huge structural damage and repairs. Pay extra close attention to deck design, material, flashing and positive drainage to prevent leaking and dryrot.

Carefully Choreograph Your Turnover Meetings The meeting where developer control is turned over to a board of homeowners is a pivotal point in time and marks the tone of the future. What happens there largely determines how well the new board handles business. Here are the basics for pointing them the right way:

1. Assemble all association related information and documents required by state law. Request, seek out and confirm director candidates 30-60 days prior to the meeting. 3. Give ample written notice of the turnover meeting so all owners can attend (30 days minimum). 4. Provide an written agenda including a slate of nominees for the board and a short bio on each.

5. Hold the meeting on a week day evening in a nearby facility equipped to hold all owners.

6. Have a sign-in sheet to verify who showed up and keep a copy in your records. Quorums are necessary for a legal meeting so the record must show that the minimum number of bodies or proxies where accounted for.

7. Hold the elections of new directors.

8. Formally turn over all relevant information and documents to the new board at the meeting.

9. Provide food and non-alcoholic beverages to leave a good taste.

Provide for Board Training Providing resources to the new board to get them up and running as soon as possible is a great way to ensure their success. 

Stand By Your Work   Leave the new board with the feeling that you will be there to help. Be accessible, especially during the warranty period. Unanswered phone calls stir the pot of discontent.

Now that you are preparing to launch your new association on the road to success, make sure you clear that road of potholes and tiger traps. Above all, avoid falling in a trap of your own making.  Remember, mess with a homeowner, you get "the claw"; mess with the Board, you get "the whole tiger".    BACK

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