advice on hoa takeover from developer

I am a owner in a 210 unit complex that is preparing to take over from the developer. Ownership is at 71%, we are located in SC and we have many concerns and questions that we should be aware of before the transfer takes place, advice would be appreciated.

Dennis:

Hopefully your HOA has the funds to hire an Engineer, however too many I have seen at this transition stage do not. First if you have an MC they should help guide you through this important stage.

You need to check your financials making sure the books are right at turn over. Also if you do not have the funds, have the board walk around the community with a clipboard and make a list of everything you see that is not right within the development. Make sure you receive all the records that belong to the HOA, plat maps of the community, if you have irrigation throughout the community get the plans showing where they are, hopefully a reserve fund was established by the developer. If not the board needs to evaluate your amendities and the cost of replacement and begin to fund a reserve.

Establishing communication between the HOA and the City officials, police dept, planning dept, zoning and code enforcement will really help the board at transition.

Dennis,
I strongly suggest an "engineering study "to ensure that all of your infrastructure is working properly and is good to go for at least a dozen years or so. It will cost some money but well worth it in the long run.

Get a couple of estimates as your developement is not very large and will be less that what we spent.

If you feel that the cost is too hogh, call your County and see if the Bonds have been released back to the Developer. They are required to be "signed off" by the association and I certainly would not release them until I knew that my developement was in good shape.

Are there any areas that you are concered about as to their quality of workmanship or functuality? Address those by a private inspector if you do not want to use an engineer.

DennisH1,

This is comprehensive, so I'd suggest printing it, digesting it's contents, and ask away if necessary.

Whether your association has the money or not, the engineering firm should be interviewed solely by the owner controlled board members (no involvement with the developer), an expense contracted and paid for by the owner controlled board on behalf of the entire association. Additionally, you still have 61 dwellings to be constructed, right? The Developer/Builder is still on the Board, right? If the expense requires a one-time owner contribution, or increase in maintenance to cover the cost as it’s incurred, it will be the best, most valuable expenditure the association can provide itself.

An excellent site for a conceptual overview of Reserve studies is as follows:
http://www.hoaservicesgroup.com/reserveStudiesArt1.html

That said the process of turnover from developer to owners is called Transition. The most important bit of advise my association received was to not rush anything, to learn when to move quickly, and when to move with caution. Basically the process is hurry up and wait. Remember, you are only one person. Transition takes a village.

Some associations develop a Transition committee of owners to interact with the Board to provide an owner perspective analysis of the community as it’s constructed. The Board can then review the analysis and make recommendations to the engineering firm. The engineering firm performs a series of studies in depth and scope chosen and directed by the Board. Your Board should contract at minimum a Capital Reserve Replacement Analysis (CRRA) or Financial Analysis, and Deficiency Study (of constructed elements) (DS) or Physical Analysis. The more in depth the scope, the better the analysis, and perhaps the larger sum that can be negotiated by the Board’s attorney with the Developer's attorney for settlement. That is what Transition is really all about. Ascertaining the flaws and attempting to settle on an amount with the Developer to better fund the association over time. Reason: Developers /Builders may cut costs in the construction of elements, may not perform everything to code (items may be missed by the municipality’s building/code department), and Developers/Builders may low- ball the initial budget.

CRRA: This study will provide table(s) that will show the estimated replacement cost of each element the association must replace, the units of measure of each element, the estimated life span of each element, the total estimated cost of replacement of all elements. This study may also provide graphs to show estimated expenditures over-time.

Reserve Account: If one does not already exist with the Board should establish a Reserve Account used only for accruing funds that are a portion of the maintenance fees. The Developer/Builder should have established this Reserve account and have been contributing it’s fare share as well as that collected from the owners after the first dwelling close/sale.

Funding Methods: The Board must determine the method of funding the estimated replacement costs over time. The Board must realize that replacement costs fluctuate, and typically increase over time and an engineer’s analysis should state if that is factored into the estimated replacement costs. If not, the Board may develop an increase factor.

Full Funding: To attain and maintain the reserves at or near 100 percent.

Baseline Funding: An approach to keep the reserve cash balance above zero at all times. This means that while each component may not be fully funded, the reserve balance should not drop below zero during the projected period.

Threshold Funding: Based on the baseline funding concept, but allowing a minimum reserve cash balance as the threshold. It relies upon a predetermined dollar amount as the threshold.

Statutory Funding: Based on local statutes, which set aside a specific minimum amount of reserves as required by law.

Negotiating Tips:

Sign of on, and accept, nothing from the Developer/Builder easily.

If defects are found, write a letter from the Board to the Developer/Builder requesting it be remedied at their cost within a certain period of time. State that if the Developer/Builder does not fix or respond to the request within a certain period(s) of time, the Board will make the repair at it's cost on behalf of the association and bill the Developer/Builder or build it into the Transition negotiations. Basically, if you don’t ask, you'll never get.

It's important for the Board to receive copies, or make copies of the architectural, electrical, roadway, and landscape blueprints, and all warranties the Developer/Builder may have. If the Developer/Builder can’t or won’t provide the plans, copies should be on file with the local municipality, borough clerk, or building and code department.

It's crucial for the Board to develop a dialogue with the local/borough officials (engineer, clerk, code department, mayor, etc.)

I don't know how it works in other parts of the country but in my state the Developer/Builder has to post a bond with the borough after the developer's agreement is negotiated. This bond is slowly released back to the Developer/Builder as the planned community is constructed.

The roadways may have an additional maintenance bond that may be withheld by the bond holder (borough) for years beyond the end of Transition. A written extended warranty may be negotiated by the Board with the Developer/Builder. Rare, but it worked in my HOA.

My association Boards (HOA and COA) chose a yearly funding method of allocating a threshold amount of 5% of each association's estimated replacement cost as the goal. Also to keep a minimum balance in the Reserve accounts. There have been, what I consider to be, some unwise decisions by an elected few, but I am pretty much powerless to stop it. For example, rather than fund for the estimated replacement cost of townhouse roofs (sheathing, shingles, and roof mechanical systems), a quorum of the Board chose to request the engineer redo the study to show an estimated replacement cost of just the roof shingles and only to overlay, not remove the original shingles. The overall difference in cost is significant. However, over time, and divided by each dwelling per month, per year, it translates to peanuts in yearly savings. I would have preferred the Board fund for the roof sheathing, shingles, and mechanical systems. My feeling is if it's determined that in 10 years there is an excessive overage in the reserve account than the reserve allocations can be readjusted. However, there's a great deal of unknown when it comes to the mass production of townhouse roof construction, materials tend to be inferior to the construction of roofs of traditional single-family homes. Therefore, I felt it was foolish to fund in the initial years for the townhouse roofs like they were single-family homes constructed by a reputable builder. Another hysterical (yet oddly sad) error was that the townhouse Board won't provide an explanation on what seems to be a serious miscalculation of the threshold amount of 5% of the estimated replacement cost (ERC). They are setting aside apprx. $18,0000 less than 5% of the total ERC. My hope was that the the difference was being allocated to a different account than reserves.

The lesson to be learned here is that communication about Transition to the owners is key.