Best Practice Transitioning

4 min read

Almost every aspect of life can be described in terms of relationships – and the development and growth of a residential community is no exception. And, like relationships between people, relationships within residential communities evolve – a process called transitioning. And, just like relationships between people, transitioning can be harmonious or acrimonious, or even downright nasty.

What is transitioning?

Transitioning is the general process by which the control and responsibilities of the governing board of a community association are transferred from the developer to the people who have bought property in the development. Although it includes the assumption of the obligation to maintain the physical assets for which the association is responsible, and is often viewed only in that narrow context, the transition process is much broader in scope. It includes the transfer of governance, the acceptance of the common property, and accounting for funds. Transition is not a single event like the election of an owner-controlled governing board or the execution of a settlement agreement regarding construction defects in the common property. It is a multi-stage process of many events taking place over a period of time.

From a philosophical standpoint, transition begins many times as each new owner moves into a community. At that point, the new owner is subject to governance by the association that the developer has established for the operation and administration of the community, and to the provisions of the governing documents of each such association.

This includes the rules and regulations. From this point the owner must look to the association rather than to the developer for guidance and assistance in dealing with common property and other community problems – except for uncompleted or warranty work. However, the line between developer and association responsibilities is not always a clear one, especially when it comes to physical defects. More often than not, neither the developer nor the owner has an accurate or similar perception of the respective roles of the developer and the association.

Expectations and realities

Buying into an estate is a big financial commitment, and the purchaser enters into the agreement with a number of expectations. If the reality does not match the created expectation, there will be unhappiness, and all the relationships around the purchase are bound to be confrontational.

So it is very important to carefully manage what expectations are created, and how those expectations are to be fulfilled. Now that involves a number of different players: the developers, the planners, the architects, the builders, the sales team, the marketing team, the purchasers themselves and – ultimately – the residential community, board or HOA.

Changing relationships

The relationship between the parties involved is formulated well before the first owner moves in. It starts off during the design phase for both the physical structures and the governing documents, develops through the construction phase, into the sales period, and then continues to evolve as the owners begin to take control of the association, and shape the reality of their purchase. If not well planned and properly managed, these transitions can become adversarial.

As discussed, different relationships are appropriate for different phases of the life cycle of a development. For example, during the construction phase, the board focuses on the quality of the workmanship, and adherence to plans and specifications can minimise the potential for construction defects to become an issue. While the sales ‘phase’ overlaps all the other phases from before construction to after the first residents have moved in, sales also has its specific challenges such as ensuring honest representation in marketing material, and attention to detail when drawing up contracts of sale, finance, etc.

And, once most of the units have been sold, the developers should start handing over responsibility for the administration of the community association and the maintenance of the common property. Preferably, this should be a gradual process that allows the owner board members the opportunity to receive proper training and to gain experience. Also, a progressive transfer of control helps protect the developer from malicious and financially harmful actions by the owner members of the board while the developer still retains a substantial economic interest in the project.

Commonly, the guidelines require the election of a minimum number of owner board members at various stages of sales, beginning at 25% and continuing to 75%. At this point, the owners usually elect the entire board with the exception of one developer representative who can remain until the completion of sales for the project.

Planning for transition

The ultimate goal of transition is for the homeowners to take over and move forward with a good reputation, no litigation, healthy finances and an optimistic view of the future. There is no one-size-fits-all ‘right’ way of transitioning, but there is a wealth of experience from which to learn. The Association of Residential Communities (ARC) has produced a set of guidelines that builders and associations can use to develop and turn over a community association project in such a way that transition becomes much easier and less confrontational.

 

Here are some of the more salient points

• Draft governing documents that focus on the developer’s right and ability to control the development of the project and sale of the units rather than its right and ability to control the board, and that enable rather than impede the business.
• Create a governance structure that encourages involvement by owners and other residents.
• Appoint a transition team in the governing documents. A transition team of owners assures other owners that the directors appointed by the developer have managed the affairs of the community properly.
• Include alternative dispute resolution measures in the governing documents.
• Keep scrupulous financial records during the period of developer control, with annual audits and a clear segregation of association funds and employees from developer funds and employees.
• Consider appointing an owner board member to serve as treasurer before the transfer of control in order to minimise the concerns of the owners, and to encourage better discipline in keeping the association’s books.
• Avoid using association employees for developer work such as completion of ‘snag-lists’, preparation of properties for sale, or property maintenance.
• Conduct construction contracts, sales and marketing in such a way as to minimise the possibility of litigation.
• Ensure that there is no gap in insurance cover at any stage of the transition process.