Developers of homeowner association properties have a dual role. Besides handling all the elements of development and construction, the developer is charged with proper management of a homeowner association which is a very complex legal entity.
In the initial stages of development, the developer owns the lion’s share of ownership interests and is in control of the Board. The developer usually elects himself President and positions employees or associates as directors. However, when sales reach a certain level (often 75% but varies according to the governing documents), a “transition” phase begins. Transition means that control of the HOA moves from the developer to the new homeowners. If the project is very large and has many phases, it may take years to get to that point. For smaller projects, it’s usually a matter of a year or less.
Unfortunately, many developers trip over the transition phase through lack of understanding, planning and attention. In an ideal world, the developer should begin the transition process long before the formal transition meeting since there is much to consider. However, since developers tend to be better developers than HOA managers, they usually cobble together a transition meeting on short notice, a few owners show up and end up being elected to the board by default. That board is usually clueless since the developer fails to inform them about HOA business and pretty much dumps it in their collective lap. (The new board’s collective heads are nodding and it sounds like a freight train....been there, had it done to us.)
The implications of such sloppiness are grave for the developer. From a legal standpoint, state statutes usually require an orderly transition process and information exchange. But most states do not monitor the process so many developers bypass or run roughshod over it. But from a practical standpoint, developers that treat transition cavalierly often reap a whirlwind of discontent. Clueless homeowners stumbling around without information cannot possibly manage HOA business properly. When they ultimately fail in proper budgeting and maintenance, guess who gets blamed? That *&#%$@ developer! (Hear the lawyers warming up?)
Here are some practical ways for developers to avoid attending the Tar & Feather Ball:
Maintain Separate HOA Bank Account. Once the developer starts collecting regular assessments from new owners, that money should go into an HOA bank account that can be properly audited by a CPA. The owners are entitled to know that all assessments were properly collected and spent. If the developer commingles money in other accounts, audit is difficult or impossible and raises big suspicion.
Include Owners on the Developer Board. While the developer has the right to maintain control of the board until transition, it’s simply good business to have one or more owners on the board to give an appearance of openness.
Include Owners on Committees. During the development stage, there are a variety of meaningful committees that will help get owners invested and informed: Architectural Control, Landscaping, Maintenance and Budget Committees can have ongoing input with the developer in constructive ways.
Provide Regular Newsletters. Depending on the HOA size, a monthly or quarterly newsletter is invaluable in keeping current owners informed about the number of sales, status of amenity construction, timing of transition, introduction to new neighbors and reminding of common issues like pets and parking. The newsletter doesn’t need to be extravagant or lengthy, just informative.
HOA Website. A website is a tremendous way to market new homes. If one is built for the HOA, it can have a section dedicated to HOA information for prospective buyers and existing owners like the current Operating Budget, Reserve Budget, Governing Documents, Newsletters and Rules & Regulations. Once the sales phase is complete, the website can be turned over to the new HOA Board from the developer. It’s one of the most useful tools an HOA board can have in its arsenal.
The Six Month Plan. Transition Meeting planning should start six months in advance.
- Six Months Out. A Transition Committee of homeowners should be assembled. The developer can handpick these individuals based on experience and compatibility (with each other and the developer). The goal should be to select folks that would make good board members, not ones carrying a personal agenda to get the developer. The Transition Committee should meet at least monthly to gain information and an understanding of HOA business. The developer should be forthcoming with that information as much as practical. This is the perfect time to cultivate trust. Withholding information breeds suspicion.
- Three Months Out. Schedule the Transition Meeting at a location that is convenient to the HOA and large enough to hold every owner. If the community doesn’t have a large clubhouse or rec room, rent a nearby school, church or community center. Midweek (Tuesday-Thursday) 6:30 -7:30 pm generally works well.
- Two Months Out. Make personal calls to prospective board members (start with the Transition Committee) and get a commitment to serve. This is the developer’s best opportunity to assemble a friendly board. Don’t waste it.
- One Month Out. Send a formal notice of the Transition Meeting along with a slate of Board candidates and a proxy form for each owner to fill out and return in a post paid return envelope. The proxy ensures you have the quorum necessary to conduct a legal meeting. During that month, assemble the information required by state statute to turn over to the homeowners.
Transition Day. Show up to the Transition Meeting with a big smile and all the applicable information indicated on our checklist. (Don’t leave loose ends). In your opening comments, remind attendees that individual warranty issues will be addressed but not at this meeting. Stay tracked on the transition purpose of the meeting. Answer questions and be brief. If you don’t know the answer, admit it and offer to find out. Keep your word. This is a testing time by the homeowners. Sincerity is easy to detect. So is BS. Strive to invoke a sense of trust with the group. Keep the meeting brief, no more than an hour.
After comments and Q&A, the primary item of business is to elect the new board. Since all the candidates are already lined up (You did do this ahead of time, right? Review Two Months Out above) the election should be by acclamation (read “slamdunk”). When the election is complete, the new Board selects officers. The developer should promise to be available to assist the new board during the first six months after transition.
A tripless transition will build enormous credibility for a developer and help diffuse potential legal challenges that can crop up when loose ends are not firmly tied. With careful advance planning, the developer will cultivate a higher level of trust with the community members. People that trust each other are much less likely to sue one another. That’s a good thing for everyone but the attorneys, right?
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