The transition process is the most important part of a Community Association’s early life as it sets the stage for the newly elected board of trustees to take control of the Association. While many people view transition as the point of time when the developer transfers control to the association board, in reality, transition is a process which starts when the developer first decides to build a Community Association and ends after the homeowners have taken complete control and the developer is no longer involved with the day to day operation of the Community. The point in time when the Association actually takes control is known as “turnover” and generally occurs once 75% of the units have been sold.
Involved in the entire transition process is a team of professionals, created by the developer, which includes the developer’s attorney, the management company, an engineer, an accountant, as well as the board of trustees who will be representing the newly created Association. In today’s economic climate, the slow sale of residential properties makes this process is even longer and more complicated. In addition, in some instances uncommon hurdles delay the process even more, such as developer bankruptcy. In these situations it is even more critical that the board of trustees is educated in order to understand the situation facing both them and the developer in order to make the process as non-confrontational as possible.
The transition process starts when the developer first decides to plan and construct a Community Association. It is at this point that the developer assembles a team to begin the design process and provide the Community guidance in developing the initial budget and governing documents. In the past many developers did not recognize the importance of establishing this team of experts. Today, most developers recognize how they can minimize potential claims in the future. Once this team has been established, they work with the developer to decide what kind of Community Association is going to be created and then help prepare its specific governing documents, which include a description of the common elements that will ultimately define the responsibilities of the new Association. The team will also establish the new Association’s budget, which includes the estimated daily operating costs, establishment of a reserve fund, maintenance fund and estimated energy costs. The complexity of these budgets and the overall turnover process can vary significantly based on the type of construction. For example, a condominium made up of townhomes with no clubhouse presents much less challenge than that of a 30 story high-rise that is a mixed-use community comprised of residential condominium units as well as retail space and other commercial areas.
The next phase of the process is the construction of the Community, which is critical as it relates to the potential for construction defect claims during the turnover process. In the past, most builders relied on their construction personnel to perform oversight of the project. Today, many builders insist on having third party inspections conducted during the course of construction to help determine if the Community is being constructed in general conformance with the plans and with good workmanship. In today’s economic environment, build out periods can be long and it is not uncommon for units to be sold before the entire Community is completely built. As these units are sold, educating new homeowners of their responsibilities during the turnover process and after is crucial. Likewise, it is very important that the management company understands how to manage a community during this critical stage.
Once the new board has been established, one of their first roles is to begin assembling the Association’s transition team to guide them through the turnover process with the developer. The Association’s experts are generally comprised of an attorney, an engineer, an accountant and the community manager.
The Engineer’s role is to prepare a Transition Study. The primary intent of the Transition Study is to identify any of the common elements which have been constructed in such a way that they are not in general conformance with the design drawings or good workmanship. In order to keep the study as objective as possible, each identified deficiency should be clearly cross-referenced to the standard that it is being measured against. For example, if there is a deviation from the design drawings, the report should indicate specifically which design drawing and where on that design drawing the proposed deviation is shown. In order to fully understand the extent of any deficiencies, the locations in which they are observed should also be identified using a punchlist with photographs of each type of problem.
A typical Transition Study also includes the preparation of a Reserve Study. This study is generally presented in two ways; pre or post-construction. The first type of Reserve Study is used to determine if the study included in the original budget of the governing documents accurately reflects the Community. If it had been underfunded from the beginning, it may result in a claim during transition. This type of study is based on the design drawings only (since the community had not yet been built) as well as replacement costs at the time the documents were prepared, full useful lives and no money in the reserve fund. The second reflects the as built community, current pricing and a beginning balance based on how much has been set aside to date by the Association and is used by the Association to move forward.
In conclusion, it should be the goal of every Association to go through the turnover process from the developer in as non-confrontational way as possible. This is primarily accomplished by taking an objective approach to the findings in a Transition Study. The way to do this is through education of the new board members in regards to how turnover works, what are the factors involved in turnover and how to stay objective in regards to any deficiencies that are uncovered both in the Transition Study as well as in the Reserve Study. It must be kept in mind that it is very rare that you will find a developer that builds something wrong on purpose. In most cases, if the findings are presented in an objective way, clearly showing that the deficiency is a deviation from a specific identified standard, the response from the Developer will also be objective with the goal of correcting the deficiencies. The turnover process can be a process where not only are the unit owners happy with the Community in which they are taking control, but the developer is also happy and can use this community as a reference for people who want to buy in their future communities.