A Condo Dream in Transition

Article written by Jack Carr, P.E., R.S., LEED AP, Criterium Engineers

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 condo complex in a great neighborhood close to shopping and hiking trails. It is your first day in Condo Heaven and you cannot wait for your new furniture to arrive.

And then you read the notice in the lobby about an association meeting tonight 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.

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 realized 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, or 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, the call for a Transition Study often comes when communications between the developer and the association have all but broken down.

As previously stated, condominium transition is not a single event but rather a process. The irony of the transition process is this important issue in the history of the condominium comes at a time when the Board could be at its lowest level of experience in dealing with such a complicated matter. This is because 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.

But before we discuss how transitions should be done, let us consider how they are often done. Owners typically take financial and administrative control of the Board after the 75% settlement mark (i.e percentage of units sold). The fortunate condo will have an experienced property management company that can give the Board guidance 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. The first step is probably the hiring of a lawyer versed in condominium law and construction practices.

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

The Board or Transition Committee will present their 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. The purpose of the engineering study is to not only 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 constructions 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 operations manuals, utility line locations, etc. that can often be just as valuable to the association’s future management as discovering all of the defects.

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; a forensic accountant should join the transition team. The purpose of this professional accountant is to confirm and verify 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 fund study can be conducted concurrently with the engineering Transition Study. This reserve fund 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.

When the Transition Study is completed it now serves as the basis for negotiations with the developer. With a well-crafted 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 call-backs, 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 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% settlement mark. Instead, when 25% of the units are sold the developer hold a residents orientation meeting to encourage owner’s 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 condo management and best practices to inform and develop a bond of trust and communication.

At the 45% settlement mark, the developer holds elections to place to 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 Fund Study is commissioned to finalize the budget.

At the 75% settlement mark, the developer turns over control to a well-trained and informed owners’ board who creates a Activities / Welcome Committee to hold a ‘get to know your neighbor gathering’ and other forms of communication to ensure a smooth transition. Now that would be Condo Heaven.