Published in the ECHO Journal, June 2007

With the large number of new condominium complexes that have been built in the last several years, we are seeing similar transitions over time. Since each transition is an area of potential problems, we thought that we would bring them to your attention.

The First Transition: Substantial Completion

In the beginning of a development, the developer hires a general contracting company to construct the buildings and site improvements. When the project is nearing completion, the builder usually issues a Notice of Substantial Completion, and this will start a warranty period. It is very important that the developer make an inspection at this time to verify the facilities were built according to the plans and specifications and file any exceptions that may need to be corrected by the contractor. It will be important later on in this process that these documents are made available to the homeowner association as part of the records of the complex.

Second Transition: Board Elections

The initial board of directors of the new association is typically populated by professionals that work for or with the developer (usually someone from the developer’s company, an attorney and/or a CPA that works with the developer) This initial board of directors of the new non-profit corporation (the Association) tends to represent the interests of the developer from the period of Substantial Completion until the new owners take possession of their units and elect their own board of directors. The point at which the owners elect their own board of directors is usually specified in the bylaws, and typically happens when a majority of the units are sold. It is important that good records are kept and given over to the new board of directors, especially those regarding construction defects and warranty issues.

Third Transition: Management of New Complex

Now the new owners’ board of directors may hire a managing agent or the complex can be self-managed, but in either case the board needs to set policies and procedures for the managers to carry out. This is a crucial period of transition for the new board because they should not assume that a new complex is without construction and management issues. In fact, they must carefully monitor the status of any construction issues remaining with the developer and contractor and work with the property managers to keep the property in good condition over time.

The author has observed that some major problems could emerge at each of these three transitions. Most of these problems come from a lack of quality construction along with a lack of awareness of how construction warranties work. The recent boom in residential construction has diluted the number of qualified contractors and vendors, and construction defects have become a major problem for all new complexes. However, a new homeowner association does not typically anticipate that its first two years will be devoted largely to the handling of construction and management problems.

Transition Consulting

To help new homeowner associations, some consulting companies are offering to provide consulting help that is crucially needed. This help is called transition consulting, and it consists of three key elements:

Start Early

Many developers are now retaining a construction inspection company to inspect not only the individual units but also the complex itself. This starts at the end of the construction period, and the construction inspection company prepares a list of items that need to be corrected or completed before the developer will accept the project from the contractor. By being a third party, the construction inspection company can help find problems before the warranty periods can expire and circumvent difficult relationships with the new buyers by delivering a well constructed unit. This type of inspection can also be performed for the common area facilities (pools, clubhouse, roof, plumbing, electrical, heating and air conditioning systems, parking, drainage, etc)

Board Awareness

A new homeowner association board of directors needs to be educated about the potential problems they will face in governing a new complex. Most important here is the status of the contractor warranties, and the initial operating and reserve budgets. This board must receive all the warranty information from the contractors and vendors and help insure that claims and warranty work is correctly carried out. The new board also needs to scrutinize the operating and reserve budget provided by the developer. Many times these budgets are unrealistic, but the implications of such budgets may not be felt for several years of underfunding. Having these budgets professionally reviewed by an outside company is a very prudent step for a new board of directors.

Attention to Management

The new property manager, whether reporting to the board or to a managing agent will need to develop a good working relationship with the board. Many boards at new complexes become complacent, not realizing that the effects of under-management or funding will not show up for years and can be very difficult to correct later. Some boards tend to micro-manage rather than focusing on policy, procedures, and performance reviews. Again, using the services of an association managing consultant to help set the direction of the new complex is a significant help. Such consultants bring many years experience and will share their knowledge learned from a large number of complexes.

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Tom Douma is the president of SRI, an ECHO member company that performs reserve studies in California and Hawaii. He is a certified Reserve Analyst and a frequent speaker at ECHO seminars.