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 TRANSITION OF COMMUNITY ASSOCIATION CONTROL FROM THE DEVELOPER TO HOMEOWNERS 

Summary:

Community Associations Institute recognizes that a successful transition is the responsibility of the owner-controlled Board charged with the fiduciary duty to investigate and assess both the finances and the physical development of the property after the developer has transferred title to the real property as well as association control. A successful transition can be accomplished through several recommended steps.

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TRANSITION OF COMMUNITY ASSOCIATION CONTROL FROM THE DEVELOPER TO HOMEOWNERS

Policy

Community Associations Institute (CAI) recognizes that a successful transition is the responsibility of the owner-controlled Board charged with the fiduciary duty to investigate and assess both the finances and the physical development of the property after the developer has transferred title to the real property as well as association control. A successful transition can be accomplished through (1) providing professional and industry-recognized educational programs for homeowners, (2) utilizing the right professionals for conducting reserve studies, transition audits and analysis of the Public Offering Statement and governing documents during the transition process, (3) managing with transparency and consistent communication with owners and (4) maintaining the association as a legal entity with its own separate records, funds and operations.

Background

In the life of every community association, there is a time at which the control of the association is transferred by the developer to the owners who are managed by a board of trustees comprised of volunteer owners from the community. At the outset, the developer establishes the entity of the association and initiates association operations, including the preparation of an accurate operating budget and the provision of an adequate reserve funding scheme, inclusive of accurate future projections. The developer also provides interim governance to the community. Eventually, the association will fully transfer to the owners who will thereafter control the association and take full responsibility for continued governance, administration and maintenance of common elements. A successful and productive transition is one in which the collective interests of the developer and the owners are served to ensure completion of the development and sales process by the developer, while ensuring that the association functions effectively. CAI recommends several practices that the Board should confirm that the developer has provided:

 Utilize educational workshops and programs conducted by recognized experts, such as CAI business partners, early in the sales process to educate owners about their rights and responsibilities and the principles of community association governance.

 Provide opportunities for homeowners to have meaningful participation and involvement in the governance of the association well in advance of the actual transfer of majority control. Conduct open and continuous communication with owners to make them aware of issues and concerns relating to the governance of their association and compliance with state legislative statutes.

 Turn over to the association originals or accurate copies of all association documents including all financial documents, as well as building plans, site plans, "as built plans," instruction manuals, warranties relating to the construction of common property or equipment for which the association will be responsible.

 Operate the association as a legal entity with its own records, funds and operations, distinctly separate from the activities of the developer, and make such records readily available to the association’s owners.

 Provide purchasers with full disclosure of the financial information concerning the operation of the association including projected operating budgets that are updated each year during developer control.

 National Reserve Study Standards (NRSS) stipulate that anything meeting the four following qualifications should be included in the Reserve Study:

1) Common area maintenance responsibility

2) Limited Useful Life (UL)

3) Predictable Remaining Useful Life (RUL)

4) Threshold repair/replacement cost

Additionally, the developer should ensure that the completed reserve study includes all eligible association elements.

RECOMMENDATION

The governing board should hire a qualified specialist, such as RS or PE, to prepare a professional reserve study during the transition process. Depending on the State, reserve studies may not be expressly required by law, but federal lending guidelines may require communities to conduct or update a reserve study once every two years where ten (10) percent of the budget is not allocated for reserves. Also, reserve studies may be one of the most reliable documents for ensuring that all common elements have been identified and included in the financial accounting. In addition to the reserve study, boards should inquire as to all specific disclosures concerning possible environmental conditions that are required to be disclosed prior to the first sale. Environmental hazards often exceed the scope of a reserve study. Finally, the board should retain an independent professional accounting firm to conduct a transition audit of the association’s finances as an integral part of transition. These safeguards are necessary to protect all homeowner investments in the community at the time of transition and for many years into the future.

In addition to consulting professionals to review legal and financial documents, CAI’s Research Foundation has made available for online download, at no charge, a 51-page Best Practices Report on Developer-to-Homeowner Transition on the CAI website. Review this document for more detailed information concerning the transition process.

State legislatures should adopt legislation that provides the same level of services by local governments to residents of community associations as those provided to residents living outside of community associations, or local governments should provide reimbursements or credits to community associations for providing such services.

  • Adopted by CAI Board of Trustees, April 8, 1983
  • Amended by the Public Policy Committee, October 6, 1993
  • Adopted by the Board of Trustees, October 9, 1993
  • Approved by the Government & Public Affairs Committee, September 20, 2012
  • Adopted by the Board of Trustees, October 11, 2012
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