bptransition.pdf

B E S T P R AC T I C E S Transition from Developer Control Transition is a multistage process that gradually transfers a developer’s control of a community association to the homeowner members. This report highlights: Roles & Responsibilities of the Developer and Homeowners...

B E S T P R AC T I C E S Transition from Developer Control Transition is a multistage process that gradually transfers a developer’s control of a community association to the homeowner members. This report highlights: Roles & Responsibilities of the Developer and Homeowners Building the Transition Team Transition Checklist and Agreement Establishing a Safety Plan BEST PR ACTICES Transition from Developer Control Developed in partnership with the Foundation for Community Association Research and the National Association of Home Builders TRANSITION FROM DEVELOPER CONTROL ACKNOWLEDGMENTS The Foundation for Community Association Research wishes to thank the National Association of Home Builders for supporting the development and distribution of this Best Practices Report. In addi- tion, the Foundation is indebted to the task force members who developed and updated this material: Primary Author Contributors to Earlier Reviewers of Earlier Mitchell Frumkin, p.e., rs Editions Editions Kipcon John Carbone Kenneth Bloom, cpa 2021-2022 Transition Task Joseph Coughlin Lynn Boyet Force Member Contributors David N. Crump, Jr., esq. Mickel Graham, pcam Mitch Frumkin, p.e., rs, Chair Robert Diamond, esq. Paul Grucza, cmca, ams, pcam Devala Janardan, esq. National Association of Home Douglas Gilliland Christine Looney Builders Howard Goldklang, cpa Jay Nussbaum Ed Guttenplan, cpa Charles Graziano J. David Ramsey, esq. WilkinGuttenplan Lynn Jordan, esq. Marjorie Meyer, cmca, pcam E. Richard Kennedy, esq. CADRExperts llc Dave Larkin Robert Diamond, esq. Reed Smith, llp Alan Lubitz Vincent J. Hager, cirms Margey Meyer, cmca, pcam Jacobson, Goldfarb & Scott, Inc. Drew Mulhare, cmca, lsm, pcam Steven Y. Brumfield, cmca, ams, Jerry Orten, esq. pcam Elton Parsons Toll Brothers Robert Travis, cirms ©Copyright 2022. Foundation for Community Association Research 6402 Arlington Blvd., Suite 500 Falls Church, VA 22042 ISBN 978-1-59618-035-2 Use Permission Readers are encouraged to print and reproduce this Best Practices Report for use by community association managers, board members, individual homeowners, and community association-related industry professionals without permission of Foundation for Community Association Research provided the following terms are met: This document must be reproduced in its entirety including the use permission statement; this document may not be added to, modified, amended, or otherwise altered from the original as presented here. Readers and users agree not to sell copies of this document or otherwise seek compensation for its distribution. Disclaimer: This document is designed to provide accurate and authoritative information regarding the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional services. If legal or expert advice is required, the services of a competent pro- fessional should be sought. The Foundation for Community Association Research is dedicated to conducting research and acting as a clear- inghouse for information on innovations and best practices in community association creation and management. As part of the Best Practices project, operations related to various functional areas of community associations— community harmony and spirit; community security; energy efficiency; ethics; financial operations; governance, green communities; natural disasters; reserve studies/management; strategic planning; and transition from devel- oper control—have been developed since 2001. 2 FOUNDATION.CAIONLINE.ORG  TRANSITION FROM DEVELOPER CONTROL W H AT A R E B E S T P R A C T I C E S ? The Foundation for Community Association Research is proud to offer function-specific Best Practices Reports in the community association industry. The Foundation has developed best practices in select topic areas using a variety of sources, including, but not limited to, recommendations from industry experts and various industry-related publications. The outcomes of the Best Practices project include: Documented criteria for function-specific best practices. Case studies of community associations that have demonstrated success. The development of a showcase on community excellence. The benefits of benchmarking and best practices include: improving quality; setting high perfor- mance targets; helping to overcome the disbelief that stretched goals are possible; strengthening cost positions; developing innovative approaches to operating and managing practices; accelerating culture change by making an organization look outward rather than inward; and bringing account- ability to the organization because it is an ongoing process for measuring performance and ensuring improvement relative to the leaders in the field. The Foundation’s entire catalog of Best Practices Reports is available at foundation.caionline.org as free downloads. Some printed versions are for sale at cost in Community Associations Institute’s bookstore at www.caionline.org/shop. FOUNDATION.CAIONLINE.ORG 3 TRANSITION FROM DEVELOPER CONTROL CONTENTS 1. WHAT IS TRANSITION?...............................................................................................................5 2. TRANSITION BASICS..................................................................................................................6 Association Governance............................................................................................................... 6 Governing Documents.................................................................................................................. 6 3. THE COMMUNITY DEVELOPMENT PROCESS............................................................................6 4. ESTABLISHING A LEGAL FRAMEWORK.....................................................................................7 5. PROFESSIONAL PARTNERS........................................................................................................8 Community Association Manager.................................................................................................. 8 Engineer/Reserve Specialist.......................................................................................................... 9 Attorney......................................................................................................................................... 9 Certified Public Accountant........................................................................................................... 9 6. INSURANCE..............................................................................................................................10 Flood Insurance........................................................................................................................... 10 Other Property Insurance............................................................................................................ 10 Fidelity Insurance and Directors and Officers Liability................................................................ 11 Workers’ Compensation............................................................................................................... 11 7. HOMEOWNER COMMITTEES...................................................................................................12 Communication and Education Committee................................................................................ 12 Maintenance Committee.............................................................................................................. 12 Insurance Committee................................................................................................................... 13 Rules Committee.......................................................................................................................... 13 Finance Committee...................................................................................................................... 14 Management Committee............................................................................................................. 14 Transition Committee................................................................................................................... 15 8. OTHER CONSIDERATIONS......................................................................................................15 Motivating Involvement............................................................................................................... 15 The Effect of the Sales Pace........................................................................................................ 15 Transferring Common Area Maintenance.................................................................................... 16 Transferring Financial Control...................................................................................................... 16 Transferring Budget Responsibility.............................................................................................. 17 Liability and Litigation.................................................................................................................. 18 9. ESTABLISHING A SAFETY PLAN...............................................................................................18 Periodic Inspections..................................................................................................................... 19 Reserve Studies and Funding..................................................................................................... 20 Maintenance................................................................................................................................. 20 10. ADDITIONAL RESOURCES......................................................................................................22 Books available from Community Associations Institute............................................................. 22 Other Books of Interest............................................................................................................... 22 Best Practices Reports (available at foundation.caionline.org):................................................... 22 11. ATTACHMENTS.......................................................................................................................23 Sample Condominium Transition Agreement and Release......................................................... 23 4 FOUNDATION.CAIONLINE.ORG  TRANSITION FROM DEVELOPER CONTROL INTRODUCTION Since the early 1970s, community associations—condominium associations, cooperatives, and homeowners associations—in the United States have become ubiquitous because they answer the need for a housing alternative that offers not only a wide range of pricing options but also an array of services and activities not generally available with a single-family home purchase. When making a major purchase such as a home in a community association, one of the key con- cerns of all involved has to do with the expectations associated with what will be received. Whether the expectations are presented as part of the governing documents, as part of the promotional literature used to sell the units, or by the builder’s representative on the original board, if the actual purchase does not match the expectations created, disappointment and disillusionment may occur. This can translate into all parties spending a great deal of money and energy to resolve both perceived and real problems. For this reason, thought must be given to the design and development of any community association so that expectations are both realistic and realized. The purpose of this report is to provide associations (and, to some extent, developers/builders) with guidelines they can use to turn over a community association successfully and smoothly. The ultimate goal of transition from developer control is for the owners to be adequately prepared to take over association governance and operations effectively. 1. WHAT IS TRANSITION? Transition is a multistage process that gradually transfers a developer’s control of a community associ- ation to the homeowner members. Transition takes place over months and, sometimes, years. It is not defined by any specific action or event and is implemented somewhat differently in each community. Transition begins when a developer makes the decision to build a housing development and culmi- nates when ownership, governance, and responsibility lie completely with the homeowners association members. The requirement for a formal transition process is a legal one, established by state law and the community association’s governing documents. After turnover, the developer’s role is primarily related to construction, prior financial operations, and warranty issues. Transition does not end developer exposure to liability, as state law may continue to provide recourse for construction defects and warranties. FOUNDATION.CAIONLINE.ORG 5 TRANSITION FROM DEVELOPER CONTROL 2. TRANSITION BASICS Association Governance A primary component of the transition process is the transfer of governance responsibility from the developer to the homeowners. Initially, the developer appoints the board members; these are typically his or her employees. At turnover, the owners elect volunteer residents to represent them on the board. In some states, statutes or regulatory mandates, as well as each association’s governing documents, determine exactly how the transition process will occur and set specific benchmarks that must be reached. Board transition is a gradual process that allows homeowner members to receive training and gain experience prior to turnover. A progressive transfer of control helps reduce conflict and avoid legal action while the developer retains a substantial interest in the project. Governing Documents Community association governance is based on doc- BEST PRACTICE: The developer uments prepared and registered by legal counsel on compiles all association governing behalf of the developer. The association is created documents, policies, and procedures by recording policies, procedures, and restrictions in in a manual for the new board, the instruments typically called trust deeds; declarations; association, and the management covenants, conditions and restrictions (CC&Rs); or company. This document provides charters. details on established policies and procedures and how to enforce Other documents that the developer prepared architectural policies and communi- must also be transferred to the homeowner-controlled ty rules and regulations. board. This documentation includes the articles of incorporation, association bylaws, and community rules and regulations. It may also include deeds, surveys, utility plans, service contracts, inventories, inspection reports, operations manual, and a preliminary reserve study. 3. THE COMMUNITY DEVELOPMENT PROCESS When starting a new community, the developer acquires a tract of land, prepares plans, and seeks approval to build a community of defined size and facilities on the site. The developer determines what shared facilities, common areas, and basic services will be necessary to make the community functional and attractive to buyers. Working with engineers, architects, planners, and county or municipal agen- cies, the developer obtains necessary approvals, zoning reviews, building permits, and utility service contracts to create the community and make it operational. While the planning, permitting, and financing activity is underway, the developer also must determine how the community will be operated and managed. The governing entity, the community association, is legally chartered and registered, usually as a nonprofit corporation, with the developer identified as the responsible party and primary agent for the association. Most developers build model homes and present a schematic model of how the community will look when it is fully built and occupied. Potential buyers receive information packets explaining that ownership comes with defined responsibilities for association governance and management, which the buyer must understand and accept. 6 FOUNDATION.CAIONLINE.ORG  TRANSITION FROM DEVELOPER CONTROL During the initial build-out phase, the developer appoints people to serve on the association board, and they are responsible for initial governance, financial operations, creating and enforcing community rules, and providing basic services. Association activity at this stage includes paying taxes, enforcing community rules, and arranging for snow removal, landscaping, trash removal, pool maintenance, and other essential services. The developer may choose to involve homeowners in some aspects of association activity early on, but this is not required or typical. The developer’s employees usually serve on the board before turnover. As the build-out process moves forward, the BEST PRACTICE: Early in the tran- association may become legal owner of certain shared sition process, the developer adds a physical assets, known as common elements, and the minority of homeowners to the board developer may invite several homeowners to join the or creates a homeowner advisory association board to begin learning about governance board to ensure that homeowners are and community management. prepared to assume leadership of the community after turnover. In most states, the developer must relinquish control of the association when community build out or home sales reach a certain level, usually around 75 percent completion or at a certain time if the development will be under construction for a long time. At this point, the homeowners become increasingly responsible for community governance, management, and operations. This phase of the transition process is when most community associations make decisions about engaging professional management. Some associations start with “self-management” where volunteers who serve on the board take responsibility for basic community operations. Most boards quickly discover the need for professional management services as the transition process becomes active. 4. ESTABLISHING A LEGAL FRAMEWORK A legal framework is a broad system of rules that governs and regulates decision making, agreements, and laws that are recognized and enforceable. For community associations that legal framework is established in state statutes and the association’s governing documents. Therefore, establishing the legal framework for transition is one of the most important parts of the transition process. The legal framework for transition, especially for condominiums, typically is established in broad terms in state statutes, which set minimum standards for the process. Nevertheless, developers have substantial latitude in determining the legal framework for transition when drafting a community asso- ciation’s governing documents. BEST PRACTICE: Developers thoroughly understand the requirements established in state statutes to draft the association’s legal documents appropriately. BEST PRACTICE: Developers make a conscious effort to balance their interests with the owners’ interests during the planning process. Developers provide protection for the own- ers and flexibility for themselves. FOUNDATION.CAIONLINE.ORG 7 TRANSITION FROM DEVELOPER CONTROL BEST PRACTICES FOR ADDRESSING TRANSITION IN GOVERNING DOCUMENTS Governing documents address the developer’s right to control architecture, design, development, and sales, rather than controlling the board. Governing documents enable rather than impede the association’s business and financial management. No provision should be considered boilerplate; even the most standard provisions should be drafted to aid in a successful transition. Governing documents specify procedures that encourage owner and resident involvement. Governing documents establish a transition team that includes not only developer- appointed directors, but homeowners as well. Governing documents include provisions for alternative dispute resolution. Governing documents establish reasonable schedules for turnover that follow state law or lending agency guidelines and provide for a phased, increased number of owners on the board. 5. PROFESSIONAL PARTNERS Optimally, the developer hires a team of professionals who are knowledgeable in all aspects of communi- ty association operations to guide homeowners through the transition process. By creating a professional team, the developer encourages the best designed and operated community association possible and reduces the potential for litigation after turnover. BEST PRACTICE: Once the com- munity has been turned over to Specialists are available to help owner boards and the homeowners, the board’s first developers navigate the transition to owner control. action is to hire a professional These professionals include managers, attorneys, engi- community association manag- neers, and accountants who can provide constructive er who will help identify and hire assistance in achieving a successful transition. other professional partners. The new manager has professional cre- Community Association Manager dentials or designations such as In many cases, the first manager retained to represent Certified Manager of Community the community is hired by the developer. Hiring the Associations (CMCA), Association manager initially retained by the developer has its Management Specialist (AMS), advantages and disadvantages. Large-Scale Manager (LSM), and Professional Community The developer’s manager is familiar with the proper- Association Manager (PCAM). ty, however, that affiliation may cause the perception of Homeowner majority boards con- a conflict of interest. Furthermore, the developer’s man- sider hiring the developer’s man- ager may not specialize in community association man- ager only if that person has these agement. Knowledge of, and particularly certification in, qualifications. community association management outweighs whatever familiarity a manager may have with a specific property. 8 FOUNDATION.CAIONLINE.ORG  TRANSITION FROM DEVELOPER CONTROL Engineer/Reserve Specialist BEST PRACTICE: The associa- An engineer’s role during transition is to prepare a transi- tion engineer conducts a formal tion study and a reserve study. transition study that includes an analysis of all common ele- The reserve study is a budgeting tool with recommen- ments and a reserve study for dations for projecting when and how much to allocate for future budgeting. future repairs and replacement of common assets. BEST PRACTICE: The associa- The transition study will determine whether the tion’s engineer recognizes the common elements have been constructed in general definition of adequate, which is conformance with the design documents and that no that sufficient funds are avail- defects exist and whether the preliminary reserve study is able when replacements are adequate. required. Attorney Attorneys, more than any other professionals, determine a community’s success or failure. Because they draft the governing documents, they provide the foundation upon which homeowners will build an association. BEST PRACTICE: Developers retain attorneys who specialize in community association law to draft association governing documents. BEST PRACTICE: The association board retains an association attorney as soon as the tran- sition process begins. In most states, it is a violation of legal ethics for the attorney who represented the developer or builder to represent the association also during the transition process. BEST PRACTICE: The developer is represented by one attorney and the association by another. BEST PRACTICE: Rather than unilaterally selecting an association attorney without home- owner board member input, the developer compiles a list of attorneys for homeowner board members to consider, interview, and select. Certified Public Accountant BEST PRACTICE: The transition Community associations have unique financial circum- board retains its own accountant to stances that make it imperative that the board hire an represent the association. This person accountant who is familiar with community association specializes in and has experience with finances and has experience working with them. providing financial, auditing, and tax services for community associations. FOUNDATION.CAIONLINE.ORG 9 TRANSITION FROM DEVELOPER CONTROL 6. INSURANCE Insurance provides protection for losses throughout the transition process, so those involved do not suffer financial losses or pass on a loss to someone else. Responsibility for insurance coverage transitions from developer to homeowners based on several factors. Flood Insurance Under the National Flood Insurance Program, the Standard Flood Insurance Policy has three forms: the general property form, the dwelling form, and the residential condominium building association policy form. A building’s ownership type and occupancy will determine which form should be used and how much the policy premium will be. Only eligible properties located in participating communities qualify for NFIP coverage. BEST PRACTICE: Developers remain knowledgeable of National Flood Insurance Program requirements and insure the association accordingly. BEST PRACTICE: Developers educate homeowner board members about flood insurance coverages and prepare them to take over insurance responsibilities. BEST PRACTICE: The association board reviews policy limits annually or when improvements have been made to ensure the association meets all requirements for the NFIP coverage. Other Property Insurance The broad term property insurance includes, but is not limited to, special form buildings and contents, equipment and machinery, earthquake, building law/ordinance, and sewer and drain backup. Developers must provide property insurance on all completed common area buildings, structures, and contents until a master policy can be written in the association’s name. Best Practice: The developer maintains property insurance on residential buildings until the first title is conveyed to an owner in a building under construction. At that time, the building will be added to the association’s policy. Best Practice: Association boards ensure that all coverages meet the minimum standards set by statutory law and the association’s governing documents. Best Practice: Until all residential building is completed, the developer carries a builders’ risk or installation floater, which would also cover common area buildings until their completion. 10 FOUNDATION.CAIONLINE.ORG  TRANSITION FROM DEVELOPER CONTROL Once an association master policy can be written, the association should cover the completed common area buildings, structures, and contents. Coverage for the completed residential buildings’ value should be added to the association’s master policy when the first unit in that building is con- veyed to an owner. Coverage is usually written on a single-entity basis, which means the units will be insured to replace or repair them to the same kind and quality originally offered or built by the developer. Alterations, additions, improvements, betterments, and upgrades made by owners would not be insured by the association. BEST PRACTICE: Developers keep owners informed about individual insurance policies they might need for their units and which personal items in the unit are not covered by the association policy. BEST PRACTICE: Owners purchase property insurance through a homeowner’s policy (HO6) or equivalent that includes personal contents, improvements, betterments, alterations, additions, upgrades, property loss assessment, and enough to cover the association’s master policy deductible. Fidelity Insurance and Directors and Officers Liability Fidelity insurance protects an association from employee BEST PRACTICE: Fidelity and theft, and directors and officers liability insurance (D&O) directors and officers liability protects against lawsuits for breach of fiduciary duty. When coverages are in force from the an association becomes a legal entity, it should purchase time the association board is both fidelity insurance and D&O liability coverage. Fidelity totally developer-controlled insurance may be subject to Federal National Mortgage until it is totally owner Association guidelines that require a limit equal to three controlled. months operating budget plus the entire reserve account. BEST PRACTICE: Insurance Workers’ Compensation coverages meet the minimum Workers’ compensation insurance protects the association if standards set by law and an employee suffers a work-related injury or illness. Even if the association governing the association does not have its own employees, it needs documents. workers’ compensation coverage since it could become responsible to someone it does not consider an employee. BEST PRACTICE: The developer has BEST PRACTICE: The association obtains workers’ compensation coverage for all separate and distinct workers’ compen- employees involved in the association’s sation coverage when it becomes a legal development. entity. FOUNDATION.CAIONLINE.ORG 11 TRANSITION FROM DEVELOPER CONTROL 7. HOMEOWNER COMMITTEES Homeowner committees provide the developer with valuable information about homeowners, an opportunity to cultivate homeowner board members, and a cadre of volunteers to help with numerous tasks. Also, homeowner committees allow new residents to become familiar with association living and to have a voice in their community. Homeowner committees are advisory, especially in the BEST PRACTICE: By the time early stages of development, when the developer makes half the homes are sold, the the final decisions. Subsequently, committees will remain association has several majori- advisory and report to the board regardless of who con- ty homeowner committees that trols it. report to the board; and, before turnover is completed, all com- In the early sales period, homeowner committees pri- mittees are functioning. marily address the community’s social needs. They help new owners become familiar with association living and make them feel welcome. Committee activity in more BEST PRACTICE: Each commit- substantive areas may occur at this stage, but it will be tee has a statement of respon- minimal. sibilities and clear goals. The more common homeowner committees include: Communication and Education Committee Probably the most important element in any community association is effective communication between the board and the owners. A good communication system will hinder cliques and factions and can help the association provide services that owners want. It also can help owners develop trust in the board members. Maintenance Committee Maintenance committee members inspect the common area’s physical elements and identify needed repairs. Members need to be familiar with the common elements and the association’s responsibilities for maintaining them. BEST PRACTICE: Maintenance committee members educate themselves by reviewing asso- ciation documents and studying maintenance manuals. BEST PRACTICE: The developer provides the maintenance committee with copies of perti- nent documents and includes them in the association’s permanent records along with the committee’s inspection reports and recommendations. 12 FOUNDATION.CAIONLINE.ORG  TRANSITION FROM DEVELOPER CONTROL Insurance Committee The insurance committee provides information and makes recommendations to the board for final decision. In small associations, insurance will be handled by the finance or management committee. In larger associations or those with extensive amenities, a separate or ad hoc committee may be needed to focus on insurance matters. BEST PRACTICE: The insurance committee reviews the association’s documents to deter- mine what coverage is required and examines existing coverage to determine if it meets those requirements. In addition, it investigates any other coverage that is needed and drafts specifications for securing competitive bids. BEST PRACTICE: The insurance committee investigates various ways to minimize insurance premiums— whether by increasing deductibles, decreasing risks, or adjusting coverage for association employees. BEST PRACTICE: The insurance committee informs owners of what coverage the associa- tion carries and what coverage they should carry. Rules Committee BEST PRACTICE: The cove- During the planning phase, the developer establishes the nants and rules enforcement community’s standards and sets minimum rules and regula- committee reviews the gov- tions necessary to sustain the community design and culture. erning documents to identify restrictions and develop poli- Rules committee activity depends on the restrictions cies and rules accordingly. stated in the governing documents. FOUNDATION.CAIONLINE.ORG 13 TRANSITION FROM DEVELOPER CONTROL Finance Committee The finance committee handles all association financial affairs, including budgeting, collecting assess- ments, developing financial procedures, reviewing books and records, and initiating audits. BEST PRACTICE: Boards establish an association finance committee as soon as feasible. BEST PRACTICE: The finance committee reviews the association’s financial records and procedures to understand the financial operation. BEST PRACTICE: During the record review, the finance committee learns how the budget is developed. It determines what information is available— from association records and other sources— to set the budget. The manager can teach committee members about proce- dures and resources. BEST PRACTICE: Before the board is majority owner controlled, the finance committee serves as a resource to the developer-controlled board when the budget is revised. When the board becomes fully owner controlled, the committee prepares a proposed budget for board action or works with the manager to prepare it. BEST PRACTICE: As owner control approaches, the finance committee reviews procedures for expense approval and check-writing so that a workable system is available. BEST PRACTICE: The finance committee ensures that the association is reporting its finan- cial activities appropriately and regularly. It reviews these reports on a regular basis and alerts the board to matters that need to be considered. BEST PRACTICE: The finance committee arranges for a certified audit of the books when majority control shifts to the owners. Management Committee BEST PRACTICE: The man- The management committee studies the association’s agement committee reviews committee structure, how committees relate to the board, all management procedures nomination and election procedures, and service providers’ and evaluates alternate forms contracts and performance. It then can make recommenda- of management (contract, tions to the board. on-site, volunteer). 14 FOUNDATION.CAIONLINE.ORG  TRANSITION FROM DEVELOPER CONTROL Transition Committee The transition committee coordinates and facilitates tran- BEST PRACTICE: Regardless sition activities. It ensures that other committees complete of structure, the transition their review activities, develop needed recommendations, committee has both owner and and resolve remaining disputes between the developer and developer representatives. the association. It is a joint committee of owners and devel- oper representatives. It is the coordinating and facilitating BEST PRACTICE: The transi- body for the actual transfer of control. tion committee ensures that all records, books, and files 8. OTHER CONSIDERATIONS are current and complete and that the association is in good Motivating Involvement standing with all appropriate New owners must become involved in the association for governmental bodies. a developer to successfully transfer control to them. For homeowner involvement to be meaningful, developers should include homeowner participation in the document review and budgeting processes and reviewing construction as it takes place. Developers can encour- age homeowner involvement by supporting and educating them about association operations and governance. Conversely, homeowners can represent themselves if they believe their interests are not being served. Developers will likely be responsive to homeowner requests to become involved. Even without developer sanction, homeowner activities will benefit the owners. BEST PRACTICE: Developers encourage homeowner involvement by ascertaining their skills and interests, facilitating neighbor interactions, and creating committees. They enthusiastically recognize volunteer efforts to encourage more involvement. The Effect of the Sales Pace Transition is a process that depends on the rate of home sales. Decreases and increases in the sales rate each cause problems for associations. BEST PRACTICE: Developers counter the effect of the sales rate by encouraging greater owner participation and earlier education than the sales level might warrant. FOUNDATION.CAIONLINE.ORG 15 TRANSITION FROM DEVELOPER CONTROL If sales fall off, and progress toward owner control is slowed, owner leaders may feel their involvement no lon- BEST PRACTICE: As early ger affects the association’s operation. Motivating them to as possible, the developer stay involved becomes a challenge if they lose enthusiasm provides homeowner board for volunteering. When sales eventually pick up and tran- members with: sition becomes a reality, homeowners are not prepared to Comprehensive information accept association responsibility. and education on associa- tion operations. The reverse of this situation is rapid sellout, but it too leaves owners unprepared for their responsibilities. CAI memberships. An accredited management Transferring Common Area Maintenance company or manager. One of the responsibilities the developer will transfer to the Consulting services after owners is maintaining physical assets. Normally, owners do turnover. not become responsible for maintenance until after they have assumed control of the board, but not always. In a large community, or one developed over time, common property may need maintenance before buildout. BEST PRACTICE: The association that assumes responsibility for maintaining physical assets even while the developer controls the association minimizes questions or misunder- standings about who is responsible for repairs and replacements. This applies also if the association has responsibility for individual property. Transferring Financial Control If the developer has kept proper financial records and followed appropriate practices while controlling the board, transferring financial records and responsibilities should not present a problem for owners. BEST PRACTICE: Developers transfer responsibility for accounting and financial record keeping to the owners when they assume majority control of the board. BEST PRACTICE: Developers appoint an owner board member as treasurer before owners have majority control of the board to ease owner concerns about finances and to provide owners with valuable financial and record keeping experience. BEST PRACTICE: Developers establish and maintain separate books and accounting records when the association is formed or when the first closing occurs. Developers ensure that association employees do not work for the developer and vice versa. A clean separation exists. 16 FOUNDATION.CAIONLINE.ORG  TRANSITION FROM DEVELOPER CONTROL Transferring Budget Responsibility Transferring budget responsibility is part of the overall financial operation of the association. Developers typically analyze comparable projects to get an idea of the profitability of a prospective project. They prepare an initial or preliminary budget based on their proposed plans that projects revenues and expenses. Once development begins, the numbers invariably change. However, preparing the budget early in the process leaves ample time to modify plans if needed. Homeowners need to understand this process. Budgets should be revisited and updated annually. With each new budget, an explanation as to why it may differ from the previous should be provided, and input should be solicited from homeown- ers as to the level of services provided. BEST PRACTICE: Developers educate homeowners about the purpose of a preliminary bud- get and how and why it is adjusted over time. In communities where the developer initially subsidized the project, the amount of the subsidy should be accounted for and should also be explained to the homeowners with clear detail as to when that subsidy will end. BEST PRACTICE: The budget reflects the procedure and formula the developer used to pay assessments on unsold units. (The developer may be obligated by statute to pay 100 per- cent of the assessment on unsold units in most condominium associations, and a smaller percentage payment is possible in homeowners associations.) The developer provides an affirmative statement of this procedure from the first sale. BEST PRACTICE: Developers eliminate shortfalls in reserves at transition by updating reserve studies (as specified in the National Reserves Study Standards) during the devel- oper control period. FOUNDATION.CAIONLINE.ORG 17 TRANSITION FROM DEVELOPER CONTROL Liability and Litigation During the transition period, liability is always a concern—for developers and homeowner boards. Some think construction defects are inevitable during homebuilding, but this does not mean litigation is inevita- ble. Developers and homeowners are increasingly working together to reduce problems during transition. The three developer’s activities that create the greatest potential for liability are construction, marketing, and sales; for associations, fiduciary responsibility probably presents the most significant potential. Theories of law regarding construction defects, breach of warranties, fraud, negligence, breach of fiduciary duty, and other areas of liability should concern developers and associations alike. They are complex, and they vary from state to state. Examining these areas of law—including prevention and remedies—is beyond the scope of this report; those involved in the development process are strongly encouraged to educate themselves using other resources like Developer Transition: How Community Associations Assume Independence; Standards of Care: A Survey of State Standards; Volunteer Immunity: A Survey of State Laws. Each is available from CAI Press, www.caionline.org/shop. 9. ESTABLISHING A SAFETY PLAN Transition is not only a time for the new board to take control of the community, but it’s also a time to put in place plans for replacing, maintaining, and preserving the common property. Particular attention should be placed on buildings and their structures. A proactive plan—one that begins with the developer—must be put in place. The importance of this type of planning was seen clearly with the collapse of Champlain Towers South in Surfside, Fla., in June 2021. While the reasons for this tragedy have not been fully determined, a crit- ical review of how to keep this from happening again has been undertaken by Community Associations Institute (CAI). Although just a starting point, CAI convened stakeholders across the globe and from a wide range of disciplines, expertise, interests, and organizations to develop and publish Condominium Safety Public Policy Report. The task forces that worked on the report recognize and explain the neces- sity for a plan of action that incorporates reserve studies, maintenance, and periodic inspections. While each area of the plan evaluates various physical components of the community, the overall plan not only incorporates all components but also evaluates the budgetary impact of each over the life cycle of the community. While the collapse in Florida was of a high-rise, it is understood that this type of planning is depen- dent on the building’s structure, not just its height. The plan should cover structural components and all of the common elements through the reserve study. While the public policy report focuses primarily on the building structures, the plans proposed include all common elements. BEST PRACTICE: Structural components are defined as the major structural elements, owned, or maintained by the community association, of a multifamily residential build- ing(s) of concrete, load-bearing masonry, steel, or hybrid structural systems such as heavy timber including podium decks. 18 FOUNDATION.CAIONLINE.ORG  TRANSITION FROM DEVELOPER CONTROL While the concerns for issues such as these become more critical as buildings age, it is clear that the planning for this process starts during construction and with the information provided to the new community by the developer. BEST PRACTICE: It is important to understand that while a reserve study is a critical part of this goal, it is only one part of a community’s safety plan. From a construction perspective, the proposed plans and basis of these plans is not related to improper construction but to the aging of the building and making sure improper construction does not occur. To address this, it is recommended that the developer: Perform ongoing inspections during construction to confirm general conformance to the plans and specifications. Provide a complete set of the final approved architectural and engineering design drawings used for construction which reflect any changes to the community that took place during con- struction. This is most important relating to the structural components of the buildings. Provide a preventative maintenance manual to the association to be undertaken by the asso- ciation over the life of the common area components. Provide to prospective purchasers a summary of the future building inspection requirements. The purpose of the above is not only to make sure that the buildings are constructed properly but also to provide the information and guidance necessary for the new community to implement a plan for monitoring the common elements as they age. The elements of the recommended plan are provided below. Periodic Inspections The structural elements are the most critical relative to homeowners’ safety. Periodic inspections should be conducted to review major structural elements on the following schedule: For new construction, the first inspection shall be conducted no later than five years after occupancy of the building. For existing buildings more than 10 years old that have not yet been inspected, the first inspection should take place within two years. After the first inspection has taken place, future inspections should be conducted a maximum of every 10 years during the first 20 years after construction and a maximum of every five years thereafter. At any time that an event occurs that affects the building’s structure, such as a significant weather event. FOUNDATION.CAIONLINE.ORG 19 TRANSITION FROM DEVELOPER CONTROL Reserve Studies and Funding Another critical part of long-term planning is the reserve study. The planning not only includes the preparation of the studies but also providing for adequate funding. CAI’s National Reserve Study Standards, updated in 2019, are the recommended standards to be used in the preparation of the community’s reserve study. BEST PRACTICE: Adequate funding is defined as a funding plan in which special assessment or borrowing is not required when a replacement occurs. These studies provide funding for the replacement of the common elements as they reach the end of their useful lives. It must be recognized that a reserve study is a budgetary tool and does not include a review of a building’s structure and that the Reserve Specialist (RS) designation offered by CAI does not require that the person preparing the reserve study be a structural engineer. It is recommended that reserve studies be prepared with the following guidelines: By the developer: - Prepare a preliminary reserve study for inclusion in the disclosure documents as a part of the initial budget. - Prepare a full reserve study at the completion of construction to reflect the as-built conditions. - Provide ongoing funding in conformance with the study and reflective of reserve study components as their construction is completed. - Include within the study the cost for both updating the study as well as for performing periodic structural inspections. By the community: - Update the study with a best practice period of three years maximum. - Include within the study the cost for both updating the study in the future as well as for performing periodic structural inspections in the future. - Provide ongoing funding in conformance with the study. Maintenance The remaining part of this planning is maintenance. There are two types: planned maintenance (defined as preventive maintenance) and unplanned maintenance (defined as corrective maintenance and may be uncovered as part of the periodic inspections). BEST PRACTICE: Preventive maintenance is applied to the From a budgetary perspective, the lack of preventive components contained within maintenance which results in a loss in useful life of the the reserve study to make sure reserve study components will result in increases in reserve that the included components fund contributions, special assessments, or borrowing to reach their full useful life. perform replacements that are required earlier than planned. 20 FOUNDATION.CAIONLINE.ORG  TRANSITION FROM DEVELOPER CONTROL The need for corrective maintenance is uncovered as a part of the periodic inspections. If discov- ered, it should be budgeted for and performed to prevent a progressive deterioration as well as a potential safety issues. BEST PRACTICE: From a life cycle perspective, the cumulative cost of preventative or corrective maintenance is significantly less than the consequential remediation and early replacement costs if not funded and implemented. In conclusion, it is critical that, as a part of the transition process, the community not only look back at what they are now in control of but also look to the future to maximize their property values and continue to live in a safe community. With all of this information at hand, the new community can now put into place a plan for both budgeting and monitoring their buildings as they age. FOUNDATION.CAIONLINE.ORG 21 TRANSITION FROM DEVELOPER CONTROL 10. ADDITIONAL RESOURCES Books available from CAI Developer Transition: How Community Associations Assume Independence, by Amanda G. Hyatt, 2004. Guiding Principles for Community Association Governing Documents: A Resource for Lawyers, by CAI’s College of Community Association Lawyers, 2021. Home and Condo Defects: A Consumer Guide to Faulty Construction 3rd Ed., by TE Miller, RM Miller & MT Miller, 2022. Management Companies: How to Find the Right Community Association Professional, by Michael E. Packard, pcam, 2007. Managing & Governing: How Community Associations Function, by Clifford J. Treese, 2007. On-Site Managers: How to Find the Right Community Association Professional, by Thomas Burgess, pcam, and Pam Washburn, pcam, 2005. Self-Management: A Guide for Small Community Associations, by Debra Lewin and Ellen Hirsch de Haan, esq., 2010. For more information or a CAI Press catalog, please call (888) 224-4321 (M-F, 9-6:30 ET) or visit www.caionline.org/shop. Best Practices Reports (available at foundation.caionline.org): Community Harmony & Spirit Community Security Energy Efficiency Ethics Financial Operations Governance Green Communities Natural Disasters Reserve Studies/Management Strategic Planning Transition from Developer Control 22 FOUNDATION.CAIONLINE.ORG  TRANSITION FROM DEVELOPER CONTROL 11. ATTACHMENTS Sample Condominium Transition Agreement and Release THIS AGREEMENT made by and between the ____________________________ Condominium Association, Inc., a [State] Corporation, with offices at _____________ ______________________ ______________, ____________________ (hereafter, the “Association”) and at ______________________ a [State] Corporation, with offices at ______________________________ _______________________________. WHEREAS, ______________________ is the developer of a condominium community located in the ____________________, ______________ County, State, known as _____________________ (hereafter, the “Condominium”); and WHEREAS, the Association is responsible for, and maintains the common elements and property of the Condominium and represents the concerns of individual unit owners of the Condominium with respect to such common elements; and WHEREAS, various disputes have arisen between _____________________ and the Association concerning certain repairs to and conditions of said common elements of the Condominium; and WHEREAS, representatives of the Association and ______________________ have met on numerous occasions to discuss resolution of disputed issues between the Association and _________________________ arising out of the development of the Condominium; and WHEREAS, the Association received and delivered to _______________ engineering reports prepared by ________________ dated ________________ (the “Engineer’s Reports”); and WHEREAS, numerous letters and supplemental reports have been delivered by both ____________________________ and the Association; and WHEREAS, subsequent to the issuance of the Engineer’s Reports, ______________ and the Association conducted walkthroughs of the Condominium in an effort to narrow and resolve the outstanding issues between them; and WHEREAS, the Association and ____________________ desire to resolve this matter and mutually release each other from any and all claims regarding the repair or construction of the Condominium, provided, however, all conditions enumerated below are complied with; NOW, THEREFORE, in consideration of the mutual promises contained herein, ___________________________ and the Association agree as follows: 1. _____________________ agrees to perform all work more particularly described in Exhibit A, attached hereto and incorporated herein. This work shall be completed within the time frames more specifically set forth in Paragraph 5. 2. _____________________ agrees to make a one-time contribution of $_________ to the Association. This settlement amount will be paid within 30 days from the date this Agreement is signed. FOUNDATION.CAIONLINE.ORG 23 TRANSITION FROM DEVELOPER CONTROL 3. Release: The Association hereby absolutely releases and discharges ________________, and any of _________________ subsidiaries, subcontractors, affiliates, agents and related entities and any and all past and present officers, directors, shareholders, agents, subcontractors, or employees of any said entities, including but not limit _____________ any of the _________________, any sub- sidiary of any of the foregoing entities and any and all former members of the board of directors of the Association (“Board”) heretofore designated by ___________________or otherwise select- ed to serve on the Board on behalf of _______________________in their individual capacities (all such _________________ related entities and persons shall hereafter collectively be referred to as the “____________________”) from and against any and all liabilities, damages, promises, cov- enants, agreements, causes of action, judgments, claims, or determinations in law or in equity or any costs or expenses including but not limited to attorney’s fees, arising from or in connection with any and all claims which the Association, and its members (as claims of such members relate to the common elements themselves and not to claims arising from the Purchase Agreement or the individual unit) shall or may have against _________________ and/or _______________, and particularly any and all claims arising out of or asserted, whether, or not involving actions taken or not by ___________________ and/or the __________________, in connection with (i) the approv- al and creation of the Condominium, (ii) the preparation, approval and satisfaction of the docu- ments required for its creation, including but not limited to any Public Offering Statements filed in [State], any amendments thereto, the plans and/or specifications referred to therein or related to the Condominium and the land use documents, (iii) the construction, repair and maintenance of the Condominium, (iv) the management of the Association monies including any reserve funds, and (v) any other matter for which ________________ and/or the _______________________________ might be responsible in connection with the Condominium including but not limited to: (A) Any and all defects in the Condominium, whether latent or patent, and whether now existing or hereafter arising or discovered, including any deviation from applicable building codes; (B) Any deviations between the plans and specifications referred to in the Public Offering Statement, amendments thereto and exhibits thereto, or on file with any governmental agency, and the Condominium as actually constructed; (C) Any deviations between the plans, including site plans and amendments thereto, for the Condominium referred to in documents filed with any applicable planning board or board of adjust- ment or on file with any building department, building official or any other governmental agency including but not limited to, use or bulk variances, parking requirements, construction plans, etc. (D) Any and all claims asserted or arising out of or in connection with any matters set forth in any reports prepared by ____________________ or any representatives or employees of that firm, any documents referred to in those reports, and/or any other engineers or consultants engaged by the Association. (E) Any and all warranties, whether express or implied, including but not limited to any war- ranties under the [State] New Home Warranty and Builders Registration Act, and the Planned Real Estate Development Full Disclosure Act. Notwithstanding the above, to the extent that the 10-year warranty as to major structural defects provided by a third party insurer has not yet expired, same shall be unaffected by this release, but only as to the rights against such insurer. 24 FOUNDATION.CAIONLINE.ORG  TRANSITION FROM DEVELOPER CONTROL (F) The turnover of documents pursuant to the [applicable state statute]. 4. Simultaneous with the signing of this Agreement, the Association shall also adopt a resolution (attached as Exhibit B) by which the Board of Trustees authorizes the execution of this Agreement and Release, and ratifies the settlement of this matter. 5. Subject to weather conditions and the availability of materials, ___________________ will commence all repairs, replacements or improvements as specified above within 30 days of the execution of this Agreement. Within 180 days of signing this Agreement, Developer will complete all repairs, replacements or improvements as specified above, unless, by its terms, such repairs or improvements are not to be made or completed until some time later. 6. _________________ shall provide the Association with an express warranty for a period of twelve (12) months as to the quality of workmanship and materials for the work set forth in Exhibit A. This warranty shall commence upon written notification from ____________________ that the work is complete. Developer is not providing any implied warranties to the Association. The Association shall have one (1) year from the expiration of the aforesaid warranty to commence an arbitration or civil action against Developer, or forever release ___________________ from any such claims pursu- ant to the warranty. 7. It is the intent of the Agreement and Release that both parties waive and relinquish their claims concerning any and all defects or deficiencies, alleged or real, reported or not, discovered or not, except as provided in the ten (10) year warranty as to major structural repairs as set forth in Paragraph 3(E). 8. Should any work or matter set forth in this Agreement in an amount not to exceed Fifty Thousand ($50,000) Dollars, not be completed or resolved to the mutual satisfaction of ___________________ and the Association, such dispute shall be resolved by binding arbitration in accordance with the rules of the American Arbitration Association with an arbitrator as to respon- sibility, methods and cost allocation. Such ruling shall be binding upon both parties and may be reduced to judgment. Any dispute concerning an amount in excess of Fifty Thousand ($50,000) Dollars may only be arbitrated upon the mutual written agreement of the parties. 9. Upon completion of all work as set forth in this Agreement, ________________ and the Association shall have no further responsibility to each other with regard to the development and creation of the Community, except as provided in the ten (10) year warranty as to major structural repairs as set forth in Paragraph 3(E). 10. The Association shall use its best efforts to assist _____________________ in securing a final release of the bonds posted with the municipality for public improvements as set forth in con- nection with all approved site plans. Upon completion and acceptance by Association’s engineer of the work under this Agreement, the Association agrees not to assert any objections to the release of the bonds by the municipality. 11. This Agreement and the Exhibits attached hereto shall not constitute an admission of liability or serve as evidence of liability on the part of __________________ and/or any related entities. 12. The Association accepts the promises and covenants set forth in the Agreement in full satis- faction and discharge of all rights and/or claims now and forever due and owing. FOUNDATION.CAIONLINE.ORG 25 TRANSITION FROM DEVELOPER CONTROL 13. This Agreement shall be binding upon all successor Boards of Trustees for the Association, its successors and/or assigns. 14. This Agreement including the Exhibits attached hereto contains the entire agreement between the parties as to the settlement of their disputes and no amendment, modification or addendum to this Agreement shall be effective unless in writing dated subsequent to the date hereof and executed by the duly authorized officers of the respective parties. The requirement for such a writing shall apply to any waiver of the requirement of a written modification pursuant to this Paragraph and shall be deemed an essential term of the Agreement. IN WITNESS WHEREOF, the parties have set their hands and seals this ________ day of _________________, 20_____. ATTEST: CONDOMINIUM ASSOCIATION, INC. ____________________________________ BY:____________________________________ Secretary President ATTEST: ____________________________________ BY:____________________________________ Secretary 26 FOUNDATION.CAIONLINE.ORG  SUPPORT NEW RESEARCH. MAKE A TAX-DEDUCTIBLE DONATION TODAY. 6402 Arlington Blvd., Suite 500 | Falls Church, VA 22042 | foundation.caionline.org