Transition or Turn Over

A transition occurs when control of the association transfers from the developer to the members of the association. Many states mandate a point at which the developer must transfer control, such as a number of years after the establishment of the first board of directors, or once a certain percentage of properties are sold. It can also occur sooner if the developer chooses to transfer control. Before transferring responsibility, however, it is important for the association to confirm that the developer complied with the standard practices for construction, property management, operating the board of directors, etc.

Here is a non-exhaustive list that Miske provided:

1- Hire an attorney to represent the association who is not associated with the developer.

2- Get a punch list of any issues that the owners and association have relative to construction.

3- Determine the status of the finances.

Here is another non-exhaustive list provided by Miske:

1- Hire an attorney who is not associated with the developer, if you have not already done so.

2- Consider hiring an experienced accountant to review:

• Prior invoices to determine if some of those paid by the association were really the responsibility of the developer from a construction, warranty or other standpoint.
• Analyze if prior charges to the members were appropriate.
• Prior year tax filings.
• Prior budgets to determine if developer followed, including whether assessments were consistent with the budgets.

3- Hire an engineer to review any construction defect, warranty and/or maintenance issues.

4- Consider hiring a professional reserve company to prepare a:

• Reserve Study (to determine what amounts need to be budgeted and placed in a reserve fund to replace the capital improvements of the association in the future based on their current condition).
• Transition Study (to determine what defects the engineer sees based on non-destructive testing and his or her estimate to repair those items).
• Retrospective Reserve Study (to determine what funds should have been put in the reserve account during the period of declarant control).

5- Send out a survey to all owners relative to any issues they had or are having with the developer.

6- Obtain from the developer:

• All corporate records.
• All tax returns.
• All financial records for each member.
• All information for each member (name, address, email, phone number, etc.).
• Any development agreement with the local municipality and a copy of any bond or other funding referenced in any such agreement.
• The construction plans and specifications, or a copy of them.
• All warranties in writing for any construction or personal property.
• All maintenance and repair records for common elements.
• A list of all contractors with contact name, phone number, email and address, who worked on the project and exactly what work they did.

If any issues relating to the items set forth above or other issues arise, the first step is generally to present the nature of the issues to the developer and see how they respond. “Communication at this stage is important for both sides, as litigation is always expensive for everyone,” Miske stated. “If the issues are substantial and can’t be amicably resolved, then your attorney should share with your board the options available to it.”

Oftentimes, when an association facing construction defects is not working with one of the larger development companies, its recourse may not necessarily come from the developer or the contractors the developer used. Instead, he said the problem may be resolved through the insurance carriers and insurance policies that were taken out and maintained by the developer and contractors throughout the course of the construction. This is important for associations to remember, especially if they are dealing with substantial defects.

Can anything be done by the board before the actual transition date? Prior to transition, Miske said that the members of the developer’s board each have a fiduciary responsibility to address any defects discovered. In fact, the developer’s board has the same fiduciary responsibilities as the post-transition board. When members of a developer’s board are sued after transition, it is often for failing to resolve any defects or other such concerns. Thus, Miske advised that associations should document each problem and how they were addressed. Individual owners do not have much say in the matter prior to transition, as the board is still under the control of the developer.

Is there ever a situation where a developer will pay expenses out of their own pocket in order to keep assessments artificially low? Yes, Miske said, and that is frequently the case. “The developer often sells lots based on the low assessments,” he added. However, case law exists at the national level which states that it is in violation of the board’s—developer and non-developer—fiduciary duty to keep assessments artificially low. (See Raven’s Cove Townhomes, Inc. v. Knuppe Development Co. (1981) 114 Cal.App.3d 783.) Furthermore, in some states, though not Wisconsin, it is required that the developer fund an association’s operations in a certain way throughout the course of the development, and to make disclosures regarding the same.

Homeowners do not have the right to inspect a developer’s financial records, though they do have the right to inspect their association’s records. A developer is also required by each state to file certain documents pertaining to the approvals for building and selling homes, Miske said. Those records are presumably available to the public, including owners, through an open records request.

If the developer enters into a contract on behalf of the association, what happens after the transition? Is the association held responsible for that contract? Perhaps, he said, but it would depend on with whom the contract is made and their relationship with the developer. Ideally, these kinds of contracts are addressed on an individual basis. Contracts instated prior to the transition may be valid for up to a certain period of time, depending on the state. It is recommended that all active contracts be reviewed by the new board after the transition.