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TRANSITION FROM DEVELOPER CONTROLDuring the initial build-out phase, the developer appoints people to serve on the associationboard, and they are responsible for initial governance, financial operations, creating and enforcingcommunity rules, and providing basic services. Association activity at this stage includes payingtaxes, enforcing community rules, and arranging for snow removal, landscaping, trash removal, poolmaintenance, and other essential services. The developer may choose to involve homeowners in someaspects of association activity early on, but this is not required or typical. The developer’s employeesusually serve on the board before turnover.As the build-out process moves forward, theassociation may become legal owner of certain sharedphysical assets, known as common elements, and thedeveloper may invite several homeowners to join theassociation board to begin learning about governanceand community management.BEST PRACTICE: Early in the transition process, the developer adds aminority of homeowners to the boardor creates a homeowner advisoryboard to ensure that homeowners areprepared to assume leadership of thecommunity after turnover.In most states, the developer must relinquishcontrol of the association when community buildout or home sales reach a certain level, usually around 75 percent completion or at a certain time ifthe development will be under construction for a long time. At this point, the homeowners becomeincreasingly responsible for community governance, management, and operations. This phase of thetransition process is when most community associations make decisions about engaging professionalmanagement. Some associations start with “self-management” where volunteers who serve on theboard take responsibility for basic community operations. Most boards quickly discover the need forprofessional management services as the transition process becomes active.4. ESTABLISHING A LEGAL FRAMEWORKA legal framework is a broad system of rules that governs and regulates decision making, agreements,and laws that are recognized and enforceable. For community associations that legal framework isestablished in state statutes and the association’s governing documents. Therefore, establishing thelegal framework for transition is one of the most important parts of the transition process.The legal framework for transition, especially for condominiums, typically is established in broadterms in state statutes, which set minimum standards for the process. Nevertheless, developers havesubstantial latitude in determining the legal framework for transition when drafting a community association’s governing documents.BEST PRACTICE: Developers thoroughly understand the requirements established in statestatutes to draft the association’s legal documents appropriately.BEST PRACTICE: Developers make a conscious effort to balance their interests with theowners’ interests during the planning process. Developers provide protection for the owners and flexibility for themselves.FOUNDATION.CAIONLINE.ORG7

TRANSITION FROM DEVELOPER CONTROLBEST PRACTICES FOR ADDRESSING TRANSITION IN GOVERNING DOCUMENTS Governing documents address the developer’s right to control architecture, design,development, and sales, rather than controlling the board. Governing documents enable rather than impede the association’s business andfinancial management. No provision should be considered boilerplate; even the moststandard provisions should be drafted to aid in a successful transition. Governing documents specify procedures that encourage owner and residentinvolvement. Governing documents establish a transition team that includes not only developerappointed directors, but homeowners as well. Governing documents include provisions for alternative dispute resolution. Governing documents establish reasonable schedules for turnover that follow statelaw or lending agency guidelines and provide for a phased, increased number ofowners on the board.5. PROFESSIONAL PARTNERSOptimally, the developer hires a team of professionals who are knowledgeable in all aspects of community association operations to guide homeowners through the transition process. By creating a professionalteam, the developer encourages the best designed andoperated community association possible and reducesthe potential for litigation after turnover.BEST PRACTICE: Once the comSpecialists are available to help owner boards anddevelopers navigate the transition to owner control.These professionals include managers, attorneys, engineers, and accountants who can provide constructiveassistance in achieving a successful transition.Community Association ManagerIn many cases, the first manager retained to representthe community is hired by the developer. Hiring themanager initially retained by the developer has itsadvantages and disadvantages.The developer’s manager is familiar with the property, however, that affiliation may cause the perception ofa conflict of interest. Furthermore, the developer’s manager may not specialize in community association management. Knowledge of, and particularly certification in,community association management outweighs whateverfamiliarity a manager may have with a specific property.8munity has been turned over tothe homeowners, the board’s firstaction is to hire a professionalcommunity association manager who will help identify and hireother professional partners. Thenew manager has professional credentials or designations such asCertified Manager of CommunityAssociations (CMCA), AssociationManagement Specialist (AMS),Large-Scale Manager (LSM),and Professional CommunityAssociation Manager (PCAM).Homeowner majority boards consider hiring the developer’s manager only if that person has thesequalifications.FOUNDATION.CAIONLINE.ORG

TRANSITION FROM DEVELOPER CONTROLEngineer/Reserve SpecialistAn engineer’s role during transition is to prepare a transition study and a reserve study.The reserve study is a budgeting tool with recommendations for projecting when and how much to allocate forfuture repairs and replacement of common assets.The transition study will determine whether thecommon elements have been constructed in generalconformance with the design documents and that nodefects exist and whether the preliminary reserve study isadequate.BEST PRACTICE: The association engineer conducts a formaltransition study that includesan analysis of all common elements and a reserve study forfuture budgeting.BEST PRACTICE: The association’s engineer recognizes thedefinition of adequate, which isthat sufficient funds are available when replacements arerequired.AttorneyAttorneys, more than any other professionals, determinea community’s success or failure. Because they draft the governing documents, they provide thefoundation upon which homeowners will build an association.BEST PRACTICE: Developers retain attorneys who specialize in community association lawto draft association governing documents.BEST PRACTICE: The association board retains an association attorney as soon as the transition process begins. In most states, it is a violation of legal ethics for the attorney whorepresented the developer or builder to represent the association also during the transitionprocess.BEST PRACTICE: The developer is represented by one attorney and the association byanother.BEST PRACTICE: Rather than unilaterally selecting an association attorney without homeowner board member input, the developer compiles a list of attorneys for homeownerboard members to consider, interview, and select.Certified Public AccountantCommunity associations have unique financial circumstances that make it imperative that the board hire anaccountant who is familiar with community associationfinances and has experience working with them.FOUNDATION.CAIONLINE.ORGBEST PRACTICE: The transitionboard retains its own accountant torepresent the association. This personspecializes in and has experience withproviding financial, auditing, and taxservices for community associations.9

TRANSITION FROM DEVELOPER CONTROL6. INSURANCEInsurance provides protection for losses throughout the transition process, so those involved do not sufferfinancial losses or pass on a loss to someone else. Responsibility for insurance coverage transitions fromdeveloper to homeowners based on several factors.Flood InsuranceUnder the National Flood Insurance Program, the Standard Flood Insurance Policy has three forms: thegeneral property form, the dwelling form, and the residential condominium building association policyform. A building’s ownership type and occupancy will determine which form should be used and howmuch the policy premium will be. Only eligible properties located in participating communities qualifyfor NFIP coverage.BEST PRACTICE: Developers remain knowledgeable of National Flood Insurance Programrequirements and insure the association accordingly.BEST PRACTICE: Developers educate homeowner board members about flood insurancecoverages and prepare them to take over insurance responsibilities.BEST PRACTICE: The association board reviews policy limits annually or when improvementshave been made to ensure the association meets all requirements for the NFIP coverage.Other Property InsuranceThe broad term property insurance includes, but is not limited to, special form buildings and contents,equipment and machinery, earthquake, building law/ordinance, and sewer and drain backup.Developers must provide property insurance on all completed common area buildings, structures,and contents until a master policy can be written in the association’s name.Best Practice: The developer maintains property insurance on residential buildings untilthe first title is conveyed to an owner in a building under construction. At that time, thebuilding will be added to the association’s policy.Best Practice: Association boards ensure that all coverages meet the minimum standardsset by statutory law and the association’s governing documents.Best Practice: Until all residential building is completed, the developer carries a builders’ riskor installation floater, which would also cover common area buildings until their completion.10FOUNDATION.CAIONLINE.ORG

TRANSITION FROM DEVELOPER CONTROLOnce an association master policy can be written, the association should cover the completedcommon area buildings, structures, and contents. Coverage for the completed residential buildings’value should be added to the association’s master policy when the first unit in that building is conveyed to an owner.Coverage is usually written on a single-entity basis, which means the units will be insured to replaceor repair them to the same kind and quality originally offered or built by the developer. Alterations,additions, improvements, betterments, and upgrades made by owners would not be insured by theassociation.BEST PRACTICE: Developers keep owners informed about individual insurance policiesthey might need for their units and which personal items in the unit are not covered by theassociation policy.BEST PRACTICE: Owners purchase property insurance through a homeowner’s policy (HO6) orequivalent that includes personal contents, improvements, betterments, alterations, additions,upgrades, property loss assessment, and enough to cover the association’s master policydeductible.Fidelity Insurance and Directors and Officers LiabilityFidelity insurance protects an association from employeetheft, and directors and officers liability insurance (D&O)protects against lawsuits for breach of fiduciary duty. Whenan association becomes a legal entity, it should purchaseboth fidelity insurance and D&O liability coverage. Fidelityinsurance may be subject to Federal National MortgageAssociation guidelines that require a limit equal to threemonths operating budget plus the entire reserve account.Workers’ CompensationWorkers’ compensation insurance protects the association ifan employee suffers a work-related injury or illness. Even ifthe association does not have its own employees, it needsworkers’ compensation coverage since it could becomeresponsible to someone it does not consider an employee.BEST PRACTICE: The developer hasworkers’ compensation coverage for allemployees involved in the GBEST PRACTICE: Fidelity anddirectors and officers liabilitycoverages are in force from thetime the association board istotally developer-controlleduntil it is totally ownercontrolled.BEST PRACTICE: Insurancecoverages meet the minimumstandards set by law andthe association governingdocuments.BEST PRACTICE: The association obtainsseparate and distinct workers’ compensation coverage when it becomes a legalentity.11

TRANSITION FROM DEVELOPER CONTROL7. HOMEOWNER COMMITTEESHomeowner committees provide the developer with valuable information about homeowners, anopportunity to cultivate homeowner board members, and a cadre of volunteers to help with numeroustasks. Also, homeowner committees allow new residents to become familiar with association living andto have a voice in their community.Homeowner committees are advisory, especially in theearly stages of development, when the developer makesthe final decisions. Subsequently, committees will remainadvisory and report to the board regardless of who controls it.In the early sales period, homeowner committees primarily address the community’s social needs. They helpnew owners become familiar with association living andmake them feel welcome. Committee activity in moresubstantive areas may occur at this stage, but it will beminimal.BEST PRACTICE: By the timehalf the homes are sold, theassociation has several majority homeowner committees thatreport to the board; and, beforeturnover is completed, all committees are functioning.BEST PRACTICE: Each committee has a statement of responsibilities and clear goals.The more common homeowner committees include:C

Toll Brothers Contributors to Earlier Editions John Carbone Joseph Coughlin David N. Crump, Jr., esq. Robert Diamond, esq. Douglas Gilliland Howard Goldklang, cpa Charles Graziano Lynn Jordan, esq. E. Richard Kennedy, esq. Dave Larkin Alan Lubitz Margey Meyer, cmca, pcam Drew Mulhare, cmca, lsm, pcam Jerry Orten, esq. Elton Parsons Robert .