Lessons Learned: Transitioning from a Developer-to Owner Controlled Association

by Mariann Gerwig, GC, HI, CAM / Published August 2014

Many people buy homes in developments when they are still under construction. However, there are several things that people do not realize or are not aware of when they do this. The developer creates a mandatory homeowners association (HOA) and is in complete control of the association until a set percentage of the community is complete. Since the developer owns most of the lots while a community is under construction, they usually offer very low association dues as an incentive to purchase. This could change dramatically once the builder leaves and the community has to support itself. Once that percentage is reached, the HOA transfers from the developer to the homeowners. The developer is just like any other owner at this point and must pay dues for the lots he owns. Not many homeowners are aware of or prepared for this transition.

MARIANN GERWIG, GC, HI, CAM, CAM CONTINUED EDUCATION INSTRUCTOR, DIRECTOR OF FINANCE AND OPERATIONS AT CAROUSEL DEVELOPMENT & RESTORATION, INC.
Mariann Gerwig, GC, HI, CAM, CAM Continued Education Instructor has been the Director of Finance and Oper-ations at Carousel Develop-ment & Restoration, Inc. since 1988. For more information, contact her at (561) 272-3700, e-mail mgerwig@cdri.net, or visit www.cdri.net. Mariann has also been the Chief Financial Officer for Aluminum Design Products, Inc. since 2011 you can contact her there at mgerwig@apdinc.biz. Mariann was part of the Ad Hoc committee in 2000 and continued on as a director for nine years at her own association..

Homeowners must create a Transition Committee or an ad hoc board of directors. This committee will make sure that all paperwork, accounting, and closeout issues are addressed before taking over the responsibility of the association from the developer. A General Membership meeting should be held as soon as possible to elect the new board of directors made up of owners. Normally, a developer will call this meeting as the transition time gets closer. However, having a Transition Committee already in the process of being organized will be a great benefit to the association. A management company and legal representation need to be hired for the owner-controlled association. The earlier you can begin to put this team together the better the association will be protected. 

Some of the duties of the transition committee may be selecting the following:

• Legal representation that is experienced in this type of transition.
• Management companies to interview in order to assume the financial responsibilities.
• Accounting firm to audit the financial records turned over by the developer.
• Financial institutions to transfer the association funds held by the developer.
• Insurance broker to obtain quotes on property and general liability coverage as well as Directors and Officers coverage.

In addition to these duties, it is recommended that you meet with your local building department and make sure that the developer has satisfied any requirements the city may have had of them. Do a site survey to make sure that items such as the final coating to roads—which is usually left until all construction is done—cleaning of any sewer lines, cleaning of any man-made ponds or lakes the developer may have created, and landscaping has been completed. Florida currently has a four-year statute of limitations period for the filing of any construction defect cases. 

The list of documents that need to be turned over by the developer is extensive. This is why hiring a management company and lawyer that is familiar with association transitions is critical. The developer must turn over an abundance of records such as:

• All budget, financial, and tax records for every year that the association has existed.
• Check to see if the developer has funded any reserve accounts for the association.
• All contracts that the developer encumbered the association to.
• Current and past owner records, including approvals or denials of improvement requests.
• Site plans of the development.

Please keep in mind that we have discussed many issues in this article but not all. Many additional issues may be discovered while doing your due diligence. The sooner the association begins to organize and select the professionals they will be working with the better. It is much easier to get the cooperation of the developer when they still have a presence in the community.