Shifting from a developer-controlled community to an HOA-managed neighborhood can be challenging. There are many considerations and potential conflicts along the way. The process can take several months or even years. Moreover, there’s a lot of legal paperwork and construction phases involved. HOAs need to plan carefully to ensure a successful transition.
What is a Developer Controlled Community?
Most homeowners associations do not start as self-managed communities. More often than not, a developer establishes the planned community and sets out its scope. It creates the HOA by developing and filing the governing documents with the Secretary of State. The HOA also establishes a budget and appoints a board.
In a developer-controlled community, the board of directors is made up of the developer and people related to the developer. The developer-appointed board has a fiduciary duty to act in the best interest of the community. It manages all aspects of community life, including maintenance, assessment collection, meetings, and enforcement.
The developer may act independently or hire a management company to handle operations. The management company will take over many of the menial tasks and follow the board’s directives.
How Developer-Controlled Communities Form
Developer communities form through three phases.
- Expansion Project. The developer starts with an expansion project. It looks for land to develop, conducts a study, and purchases the property to establish an HOA.
- Pre-Development. During this phase, the developer obtains the required approvals and permits before construction. It also consults with a legal professional to create the association’s governing documents.
- Formation. The developer controlled community is established during formation. It establishes a non-profit corporation and sets the obligations, ownership, and rights of the community.
Developer Responsibilities
The developer has several responsibilities while it controls the community, including the following:
- Declaration of Covenants, Conditions, and Restrictions (CC&Rs). The developer must create and file the community’s CC&Rs to establish the HOA. The CC&Rs serve as a contract between the HOA and the residents, outlining either party’s obligations and responsibilities. They also inform the bylaws and other community rules.
- Rule Enforcement. The developer must enforce the rules found within the governing documents. When someone moves into the home, they must pay their monthly assessments and abide by the rules. Developers may do this themselves or hire an HOA management company to help them with enforcement.
- Budget. The developer must create a budget for community operations. It must be enough to cover the community’s regular expenses, operations, and reserve funds.
- Fees and Assessments. The developer-appointed board must collect assessments from the homeowners. They will be established based on the annual budget.
- Governance. The developer must appoint a board to govern the community. Often, the developer appoints its staff to become board members. The board must then hold meetings, manage operations, and vote on important decisions.
How Much Authority Does a Developer Have?
The developer has a lot of power in a developer controlled community. Homeowners will rarely influence the developer-appointed board’s decisions. The board not only runs the board but also creates the CC&Rs. Moreover, developers have a lot of voting rights because they still own a bulk of the community’s property. Residents may voice their concerns and suggestions, but ultimately, the power rests on the developer.
However, not all developers work like this. Some may proactively seek volunteers to join the HOA board. Potential buyers should do their research before buying a home in a planned development. Otherwise, they may not be happy with the board’s decisions.
Regardless of who controls the board, the directors have a fiduciary responsibility to act in the community’s best interest. If not, the homeowners may eventually file a lawsuit against the HOA. This means developers should follow the governing documents and acknowledge the homeowners’ rights.
How Long Does a Developer Control a Community?
When does a developer transition to an HOA? Is there a time limit? Unfortunately, there is no standard time limit to developer control. It is often determined by the community’s governing documents and property sales.
For many communities, the developer must begin transitioning when a certain percentage of the properties are sold. For example, the governing documents may require 20% of the board members to be homeowners when 50% of properties are sold. Many communities also require the board to be exclusively comprised of homeowners when 75% of homes are sold.
On the other hand, developer turnover does not just happen when the community has sold most of its homes. Developers may also transition control when they face bankruptcy or if the court appoints a receiver.
Some communities may also place a time limit on developer control. For instance, the governing documents may require the developer to release control when a certain number of years have passed since the CC&Rs were established.
How to Transition from a Developer-Controlled Community
Eventually, the developers responsible for managing the HOA must give up control. How does the transition from a developer-controlled community to an HOA-controlled community work? Here are the common phases.
1. Pre-Transition
During the pre-transition phase, the developer may appoint a transition committee to help the board with all transition processes. The committee may then review the community’s finances, perform an audit, check the reserves, review insurance policies, and assess the HOA’s need for professional management. Afterward, the transition committee may recommend how to proceed to the current board.
2. Turnover Meeting
The HOA may conduct an official turnover meeting to deliver all the documents to the HOA members. Developers must provide the following records to the community:
- A copy of the governing documents and its amendments
- Previous meeting minutes
- All community policies and rules
- Director resignation letters after the developer has turned over control
- Financial reports, statements, and records
- Bank accounts, signature cards, and inventory records
- Membership list
- Architectural, engineering, structural, electrical, plumbing, and mechanical plans
- Underground site services, site grading, drainage, and landscaping plans
- Insurance policies
- Official permits
- Contractor lists
- Lease agreements and vendor contracts
During the meeting, the community residents may elect a new board of directors comprised of HOA members.
3. Post-Turnover
Developers may still attend HOA meetings for a few months after the official turnover. This time frame allows them to ensure a smooth transition. The developer can advise the new board on operations and provide insights on certain decisions.
Tips for Developer Transition
What should developers and homeowners associations keep in mind during the transition? Here are some tips that might help.
1. Create the Transition Team Early
HOAs should create the transition team at least one year before the turnover meeting. This gives them time to review the HOA’s records and plan for the transition.
2. Hire Professionals
The HOA may require professional help to turn over documents and operations. Consider hiring an HOA manager who can support the association throughout the process. The HOA manager can liaise between the developer and the community. They may also handle operations and guide the board in their new responsibilities.
In addition, it may help to hire a civil engineer and lawyer. The civil engineer can review the project’s common elements and spot potential problems. Meanwhile, the lawyer may help the developer with the transition’s legal requirements.
Finally, the community may hire an accountant to audit its financial records. The accountant may check for inconsistencies, discrepancies, and signs of fund mismanagement or fraud.
3. Audit Each Contract and Document
The transition committee may audit all the executed contracts, insurance certificates, correspondence, and maintenance records. They may review and reconsider unreasonable contracts or agreements that do not work in the HOA’s favor. It may help to consult an attorney during the review.
Apart from this, they should copy and store the documents in a secure vault or online storage platform. The HOA may need to invest in additional security measures to ensure the documents are safeguarded.
4. Inspect the Community
The transition team should schedule an inspection with the community engineer. This way, they can find potential problems with the community’s facilities. The HOA can then ask the developer to address these issues before they transition control.
A thorough inspection also informs the community of where important utility lines are. The community can also obtain a copy of the neighborhood’s permits and warranties.
5. Perform and Record Maintenance
The transition team should establish an exact date to transition control over maintenance activities. Doing so can help the board prepare for maintenance duties after the transition.
6. Set Regular Meetings
The new board, transition team, and developer should hold regular meetings to ensure a successful transition. A board email may also be necessary so all directors can access important communications.
7. Take Financial Control
The new board should review all accounting records and ensure they have control over all community accounts. The developer should also be asked to turn over all bank accounts, investments, and loans to the board.
A Successful Transition
It’s not always easy to transition from a developer controlled community to an HOA-managed one. The new board may not have the knowledge or experience to run a planned community. Hence, it’s important to create a transition team early and plan the turnover in phases.
Personalized Property Management helps developers and homeowners associations with management and community transition. Call us now at 760-325-9500 or visit our website to learn more!
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