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A Condo Dream in Transition

A Condominium Dream in Transition

Article written by Jack Carr, P.E., R.S., LEED AP, Criterium Engineers
Published in Condo Media, August 2011

 
So you finally scraped enough money together for your down payment on your first home. Your offer has been accepted and the bank has approved your financing. Even better, it is a shiny new condominium complex in a great neighborhood close to shopping and hiking trails. You are moved in and enjoying your first day in "Condo Heaven" waiting for your new furniture to arrive.
 
And then you read the notice in the lobby about an association meeting to night to discuss transition issues. Well, you are aware condominiums are different from the apartment building you just left. You know a board runs the association. You remember monthly assessments go into operating and reserve accounts, but the term "transition" is new and not in the condo lexicon you have been recently acquiring.

Issues Unfamiliar and Unknown

At the meeting, you find out you are not alone. Members of the board are citing the need for a "transition study" to quantify the major construction defects plaguing the complex. Others are asking about warranty period expiration dates, while others are asking if they should hire a lawyer or an engineer first. You look around the room at the gathered association members and realize most are in the same fog as you.
 
This is often how association members find out there is a problem with the developer, their condominium, their finances or all of the above. It does not have to be that way. Transitions can be a smooth, orderly process in which all parties get what they need. Instead, and unfortunately, the call for a transition study often comes when communications between the developer and the association have all but broken down .
 
A condominium transition is not a single event, but rather a process. The irony of the transition process is that this important milestone in the history of the condominium comes at a time when the board is most likely at its lowest level of experience in dealing with such a complicated matter; not only are the board members new to their job, but even board members with prior condo experience may have only lived in a well-established condo that was well beyond the transition phase.

Road Map for Transition

But before we discuss how transitions should be done, let's consider how they are often accomplished. Owners typically take financial and administrative control of the board after the 75 percent settlement mark (i.e., percentage of units sold). The fortunate condominium will have an experienced association management company that can provide guidance to the board as to its options in dealing with a difficult developer. A transition or advisory committee needs to be formed to provide focus to the problem with the first decision of the committee probably then being the hiring of a lawyer versed in condominium law and construction practices.

The lawyer will be gin with a review of the condominium documents, which will include articles of incorporation; the declaration of covenants, conditions and restrictions; and the bylaws. This review will also include looking at all rules and procedures established earlier by the developer to ensure that they are consistent with the governing documents) as well as local real estate laws and regulations.

The board or transition committee will present its complaints against the developer. These items are categorized by their nature and magnitude during which time rough assumptions are made to the costs and quantities involved. These issues are further categorized by the rules of law that may govern and the liabilities the developer may have, such as:  breach of implied or express warranties; liabilities due to common law fraud or negligence; practices falling under deceptive trade practice acts that most states have; and misrepresentations concerning amenities. Before any serious discussions can be held with the developer, the lawyer will want third-party verification of the issues involved. This will involve engaging an engineering firm familiar with transition studies and their goals.

Engineering and Transition Studies

The purpose of the engineering study is not only to document the physical condition of the common elements in question, but also provide an opinion to the costs for repair or replacement of defective elements. This opinion should include a statement of the source of the defect. The developer should not be held responsible for deterioration due to normal wear and tear, but for problems arising from poor design, workmanship, material quality, etc. These issues are further categorized into major and minor issues. A mistake made in this process is to put too much emphasis on minor issues and cloud the real goal obtaining what the owners really need.

To assist the lawyer's position, the transition study will list the criteria and standards used in reaching the engineering opinions. This could include citing violation of local building codes; not following manufacturer's installation recommendations; not meeting industry standards; or not matching the condo projects specifications and construction drawing requirements.

This process brings surprising benefits including obtaining as-built construction plans and specifications; permits; certificates of occupancy; and an operating manual including warranties, schedule of suppliers, systems operation manuals and utility line locations that can often be just as valuable to the association's future management as discovering all of the defects.

Financial Review and Reserve Study

In parallel with this process, the lawyer may feel, due to the size of the condo complex or unexplained discrepancies in the developer's budget or fund accounts, that a forensic accountant should join the transition team. This professional accountant can confirm and verify that the developer managed the association's accounts properly and did not co-mingle any of his expenses with the operating funds established for the association's exclusive use. As part of this process, the overall budget will be reviewed to ensure the assessments being raised are appropriate for the financial future of the association. 

To assist in these efforts, a reserve study can be conducted concurrently with the engineering transition study, This reserve study lags behind the transition study as many of the issues raised in the transition study have a direct impact on whether various cost elements in the  association's future should be borne by the association or the developer.

Negotiations vs. Proactive Developer Planning

When the transition study is completed it now serves as the basis for negotiations with the developer. With a wellcrafted study based on fact and verifiable positions, the negotiations with the developer will more likely produce a scope of repair work the developer will accept. The developer's acceptance is based on his own interests. Not only does the developer avoid expensive litigation, but he now has a boundary on his liabilities and an exit plan he can quantify and schedule. 
 
But this could all have been avoided. Enlightened developers are recognizing the costs of defective construction, repair callbacks and bad publicity. They are having their plans peer reviewed before construction and hiring building inspectors to ensure quality habits on their construction sites. Furthermore, they recognize that they not only have to improve the quality of the training they give their construction crews, but also their clients, the condo buyer and subsequent association leaders.
 
To this end, many well-managed developers across the country are not waiting to turn the keys over to an untrained owner's board at the 75 percent settlement mark. Instead, when 25 percent of the units are sold, the developer holds a residents orientation meeting to encourage owner participation by developing an initial committee structure including communication/activities, budget/finance , grounds and rules. Notebooks are distributed to the new owners explaining the nature of condominium association management and best practices to inform and develop a bond of trust and communication .
 
At the 45 percent settlement mark, the developer holds elections to place owners on the developer-controlled board. This is followed by the developer funding an ad-hoc engineering warranty committee to hire an engineering firm to evaluate the condo complex for warranty and  quality issues. The committee's report is used as a basis for developing a punch list of needed repairs. Upon completion of repairs, a reserve study is cornmissioned to finalize the budget.
 
At the 75 percent settlement mark, the developer turns over control to a well-trained and informed owners' board who creates an activities/ welcome committee to hold a "get to know your neighbor gathering" and other forms of communication to ensure a smooth transition and "Condo Heaven."
 

 
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