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Transition From Developer to Owner Control Made Easy (Easier)

By Steven S. Weil, Esq.
Published: June 2021

From inception through the sales period governance decisions for a community association are made by a Board of Directors, a majority of whom are employees of or chosen by the project developer. At some point, depending on the association's size, the housing market, project phasing, provisions of the governing documents or other factors, owners will "be in charge". This article discusses the this "transition". For a "deeper dive" follow this link to our Transition pamphlet.
https://www.berding-weil.com/publications/guide-to-transition/

Understand Everyone's Perspective

Understanding the perspectives of the four stakeholders during the transition period will improve the chances of a successful transfer of power from the developer to owners. The developer and its board representatives want to quickly and efficiently sell its homes and conclude their involvement in association operations. Owner-directors want to understand and keep those operations functioning smoothly, assure the proper completion of common areas and amenities and address with the developer legitimate membership concerns. Members want "warranty" and "punch-list" compliance and to obtain all the benefits promised by the developer's sales team and marketing materials. The managing agent wants to satisfy the developer which initially hired it and with whom it may have other ongoing projects and to perform its contract and continue to serve as the manger once the developer is gone.

Even with everyone acting in good faith, the perspectives, interest, and goals of the stakeholder groups may not always align. Owners may have unrealistic expectations about the developer's obligations; management (and even developer-directors) may not have a great degree of influence with the developer; the developer (especially those which are relatively small or inexperienced) may not have the resources to respond to owner or owner-director requests or they may be unwilling to do so.

While all directors have a fiduciary duty to the association, developer directors also have duties to their employer. This dual loyalty is "baked into" the system approved by the California Department of Real Estate and cannot be avoided. One way for owner-directors to deal with this is to consider addressing requests and demands directly to the developer and not to (or not only to) the developer board members.

None of this is to criticize any of the stakeholders but only to suggest to owner-directors that a realistic appraisal of the parties different interests and 'bandwidth" is essential to an effective and efficient transition from developer to owner control.

Records

Acquisition of records is obviously important. Use of a checklist is wise. One can be accessed through our online Transition pamphlet. Below is a short summary. We suggest setting a special meeting with developer representatives and management and go over the checklist to verify what has been and will be provided.

Generally, the records an association needs fall into these categories: governing documents, financial documents, maintenance records, warranties, and bond information, and "day-to-day" documents.

"Governing documents" includes the familiar ones: all CC&Rs, amendments, annexations, bylaws, policies, and rules. Others might include all easements, development agreements, conditions of approval imposed by local government agencies and subdivision maps and the condominium plan.

Why are conditions of approval and development agreements important? Because an association may be required to implement (or complete) promises made by the developer as a condition of local approval of the project. "Financial records" include all ledgers, budgets, reserve studies, DRE form 623 (the "Budget Work Sheet" submitted on the developer's behalf to the Department of Real Estate) https://dre.ca.gov/files/pdf/forms/re623.pdf, all banking records and assessment collection information.

"Maintenance records, warranties and bond Information" include an inventory of all the association's real and personal property; manufacturer care instructions and warranties of common area components (HVAC and other mechanical components, elevators, windows, entry gates, exterior cladding, pool equipment, etc.); a list of contractors, building plans and permits and expert reports; lien releases; and maintenance and repair records and the "Maintenance Manual" (if any).

Also useful are common area completion bonds and the "Planned Construction Statement". The latter identifies common area components required to be completed by the developer (and note, claims against this bond expire two years from the estates date of the completion a component listed on the "PCS)". A list of all post-construction repairs performed by or on the developer's behalf is also important.

"Day-to-day" documents run the gamut from prior legal opinions, architectural modification approvals, enforcement letters, insurance policies and claims, membership communications, parking permits and assignments, minutes, senior housing verifications, and others. Again, a detailed list is provided in the Transition checklist.

Repairs, the Maintenance Manual and the Common Area "Walkthrough"

An inherent tension arises when repairs are needed. The developer and its representatives may believe that such repairs are "maintenance items" to be funded from assessments. Owners, including those on the board, may complain that the problems are actually construction defects that should be fixed at developer expense. Each case is different. Prompt and candid dialogue "on both sides" may not resolve this tension but will minimize disputes and illuminate outstanding issues for resolution perhaps through an SB 800 or other process. The use of a third party neutral may help at any stage depending on the nature of the dispute and the potential repair cost.

What is the Maintenance Manual ("MM") and why is it important? A developer may but is not required to provide an association with a MM; it is basically like an "owner's guide" that accompanies a new car purchase. The MM will identify common area components and set forth when and how to inspect and care for them. Compliance may require creation of reports (retained in association records but also provided the developer) prepared on a monthly, quarterly and/or annual basis which confirms the results of inspections and repairs. The MM is important for three reasons: it helps the board understand the association's maintenance and repair obligations; the failure to comply with the MM can provide the developer with defenses in a construction defect lawsuit; and because cost to implement the MM can be very expensive and not properly accounted for in the budget.

Typically the developer will want to "turnover" to the association common area components. A "walkthrough" will entail verification that common area components have actually been installed. The association will be asked to "sign off". The association should be "represented" at this meeting by owners (a committee or director[s]) and the manager may attend as well. The process is misunderstood but useful. Misunderstood because once common area is annexed, the association is responsible for maintenance regardless of a "sign off" and useful because it provides an opportunity to identify conditions that require attention. Typically, they will involve landscaping, fencing, furniture, and equipment. In the perfect case, this walkthrough will occur before the two year common area completion bond expires. In any case, the association's sign off should be an acknowledgment of what is "conveyed" but not a release of claims.

Construction Defect Claims

In our experience, defect issues arising in the transition stage pose unique challenges. A complete discussion of those issues is beyond the scope of this article. Opportunities exist for teaming up with a developer to deal with product failures or to quickly resolve problems (including those arising out of balcony inspections). An important consideration concerns statutes of limitations. Many are short, ranging from one to four years from certain "triggers". One trigger is called "close of escrow"; it usually refers to the date an owner director is first elected to the board. This puts enormous pressure on owner directors while the developer retains majority control of the board. Owner directors need independent advice from the association's counsel to address these issues and consistent with their own fiduciary duty, this step should not be interfered with by the developer directors.

Taking Charge

A transition is not just about developer issues. Unrelated tasks include a budget and policy review in time to make desired changes prior to distribution of the next Annual Budget Report (for most associations, this happens around Thanksgiving); a review of architectural and enforcement goals and processes; and a review of all vendor contracts and their performance. Meetings with vendors (like landscapers, pool contractors and insurance brokers) to communicate director expectations or to facilitate understanding of their duties is useful.

Finally, it is important that the "New Board" earn the respect and confidence of the membership. Care should be taken not to over-promise what the board can achieve in the first year of the owner "new" community. Earning confidence can be achieved by meetings, newsletters, the creation of committees and the solicitation of membership input on community goals and policies.

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