HOA Transition from Developer

We are often asked, “When should we start preparing for our HOA to transition from a developer-controlled board to a homeowner-controlled board?” Our answer is always the same, “starting on day one from when the developer first hires a professional management company.”

Setting up a community for a successful transition begins with ensuring the community will be financially stable once the Developer is no longer involved. The AAM Developer Services department begins work with our developers months, if not years, before construction commences. This process starts with preparing the initial budget to determine the reserve requirements and set the assessment rate. At the request of the Developer, AAM will also conduct a thorough review of the governing documents to ensure they align with state and federal laws. Thus, we anticipate any concerns that may arise for a community down the road. Setting an appropriate assessment rate and having the proper documentation in place sets the foundation for the association. However, remaining vigilant by taking additional steps beginning on the first day of management will contribute to a successful transition.

HOA Transition Best Practices

Below is an outline of best practices to follow leading up to an HOA transition from Developer to homeowner control.

COMMON AREAS

After installing the common areas, the Developer should document their condition before transitioning maintenance to the association. An inspection must confirm that everything is installed according to plan and the common areas are in good condition. Once the association accepts maintenance, regular inspections should monitor the common areas and address any concerns promptly. Auditing the community for maintenance issues a year before the transition is a good practice. This allows time for any maintenance concerns to be addressed while the Developer still controls the board. Failure to properly maintain the common elements throughout development can lead to problems during transition.

The Developer should confirm that ownership of common area parcels has been conveyed to the association. Some counties offer special tax valuations for common area parcels, so ensure all parcels are submitted for this valuation. Failure to do so may result in substantial future tax bills for the association. This process is simple for smaller communities but may require an HOA attorney for more complex communities. Developers should consider having an HOA attorney audit these communities before the transition to ensure proper deed and valuation.

FINANCIALS

The developer board should constantly evaluate the financial condition of the community to ensure that the association is financially stable, has a balanced budget, and has an appropriately funded operating account and reserve account. By the time of transition to homeowner control, the association should be self-sufficient. If there are deficiencies being funded by the Developer leading up to the transition, that is an indication that the assessment is set too low. By monitoring the financials through development, the developer board can ensure that appropriate assessment increases are taken to provide sufficient income at the time of transition to cover anticipated expenses.

Every community should have a reserve study in place that lays out a plan for the repairs and replacements of common areas. It is prudent to thoroughly review the reserve study to make sure that all common area improvements that should be funded are included. Studies should be updated at least every three years, unless the CC&Rs require more frequent updates, to make certain that the association’s reserve account is sufficiently funded at the time of transition. Failing to fund reserves adequately is a common area of contention with homeowner boards following the transition. 

Good Faith

There is no legal requirement to complete a reserve study or ensure the association is adequately funded. However, the Non-profit Corporation Act requires directors to act in good faith and with the care of an ordinarily prudent person. Directors must also act in a manner they reasonably believe is in the best interest of the corporation.

Common law, established through the Restatement Property (Servitudes), is court-made law based on previous court opinions. Sub-Section 6.20 outlines the Developer’s Duty to the community during the period of control. The Developer must establish a sound financial basis and maintain accurate records for the association. They must also account for the association’s financial affairs and disclose all material facts affecting its financial condition. These duties remain until the Developer relinquishes control of the association to its members.

DOCUMENT & ORGANIZATION

As the transition approaches, it’s prudent to ensure the association is well-organized. Association records should include all pertinent documents, such as CC&Rs, recorded amendments, plat maps, and common area tract deeds. Include signed Bylaws, filed Articles of Incorporation, and any working documents adopted by the developer board. Files should contain current contracts, insurance policies, financial records, development plans, and meeting minutes. Confirm that the association is in good standing with the Secretary of State or Corporation Commission.

TRAINING 

Four months to one year prior to transition, depending on the size and complexity of the community, a Transition Committee consisting of homeowners should be organized. This Committee will go through a series of training sessions regarding the association’s inner workings and the board members’ responsibilities. This is a good time for the management company to educate and build relationships with homeowners who will hopefully go on to run for the Board of Directors. Additional training for board members following the transition will further contribute to a successful transfer of control.

Our ultimate goal with any transition is for the homeowners to take control of the association and move forward with a good relationship with the Developer. Homeowner concerns with the Developer may arise within a few months following the transition. However, sometimes situations arise years later. As such, the management company must diligently follow up on any concerns and initiate discussions with the Developer to resolve issues amicably. Following best practices and having the right team from day one ensures a smooth, successful management transition.