How to develop successful homeowner associations

This article first appeared in the PB March 2008 issue of Pro Builder.

Sidebars:
Case Study: Transition of the Churchill Club Community Association
Community Associations: A Force in American Housing
Community Associations Institute — A Resource for Home Builders and Community Association Board Members

Lifestyle: it's a buzzword tossed around among home builders and developers to promote their housing communities, whether they're targeting growing families or active adults. It's not surprising considering lifestyle communities have proven to be quite popular with these target markets.

Creating a lifestyle environment typically calls for substantial amenities: clubhouses, pools, tennis courts, workout facilities, walking trails and other perks an imaginative builder includes. It also calls for a self-sustaining community. After all, someone will need to be in charge of taking care of all those fine and fancy amenities after the builder has packed up his tools and moved on to the next project.

A builder's reputation, and possibly even the entire company, is at risk if it does not properly set up the reserves, governance documents and other essentials for the community association.

When these types of communities are created, it's the builder's or developer's responsibility to establish the association that will manage and maintain the community's common elements.

Amenities found at Town & Country Homes' Churchill Club community include a swimming pool just behind a private 8,400-square-foot clubhouse. The builder recently turned association control over to homeowners, who will now manage the community property.

At any point in the process, no building company wants members of a community to band up against it, whether for construction defects, inadequate association reserve funding or other grievances. A good transition from builder to community association control can minimize animosity and even lower the amount of lawsuits between the parties. The risks are real.

"The transition process can be fraught with miscommunication and misunderstanding, not to mention acrimony and even costly litigation," says attorney Ronald L. Perl, former president of the Community Association Institute Research Foundation.

There are nearly 300,000 association-governed communities in place today throughout the United States, but the learning curve remains, says one expert.

"Considering the evolution of community associations throughout the United States and the explosion in the use of this type of residential ownership over the past 15 years, it may seem hard to believe that we are still deeply imbedded in the learning curve of how to plan, build and turn over these types of communities to the new homeowners with minimal confrontation and subsequent litigation," writes Mitchell H. Frumkin, president of engineering consulting firm Kipcon, in a white paper prepared for a 2008 International Builders' Show presentation titled "Removing the Risks in Developing a Community Association."

Frumkin also observes in his white paper that builders' and developers' efforts over the past five years for a more proactive approach to the transition process have been able to minimize the risks commonly associated with these self-sustaining communities.

Ray Blankenship, area vice president for K. Hovnanian-owned Town & Country Homes, says that some of the pitfalls between builder and association can be related to governing documents, including rules, bylaws and declarations and — perhaps even more so — money.

"As a builder, you want to keep the association dues as low as possible to help your sales effort, but if you go too low, you leave the homeowners with little to no reserves and possibly a deficit once you turn it over to them," Blankenship points out.

Blankenship says the best way to combat these issues is to establish a realistic budget that works and provide guidance for the community association in the early years. In addition, all documents related to the community should be provided to the home buyers early in the process, "so they know what they are getting into."

In his white paper, Frumkin names the three most common risks in dealing with community association: deficient construction, inadequate budgeting and inaccurate governing documents — almost an exact echo of what those out in the field say.

A set-up for success

Frumkin says risk management techniques can minimize confrontation with new homeowners. The first step, he says, is establishing a risk management plan that addresses the risk areas throughout the entire process.

Builders and developers looking to be proactive in the creation of lifestyle communities have help. In 2004, The CAI Research Foundation, in partnership with NAHB, released a "Developer to Homeowner Best Practices Report."

The free report, which can be downloaded from the CAI Research Foundation or NAHB Web sites, provides guidelines and case studies designed to help communities transition from builder to community association control. Topics covered include transition issues such as construction, governance, document preparation, communications, maintenance of common property, financial control, budgets, litigation, engineering reports and insurance.

"We worked with our partners to develop a resource that can help builders and homeowners avoid some of the most common mistakes," Pearl points out.

Smart builders might want to tap into these resources. And they can make themselves look real good in the eyes of any new homeowner board if they also make those individuals aware of best practices resources.

Case Study: Transition of the Churchill Club Community Association

Town & Country Homes, a K. Hovnanian company that has been building homes and developing communities in the Chicago area for more than 50 years, successfully transitioned its Churchill Club community, which comprises single-family homes, townhomes and condominiums in Oswego, Ill. Ray Blankenship, area vice president of Town & Country Homes, provides a step-by-step process to establish governing associations in the communities it builds.

Bids are solicited from three established association management companies.
Once bids are received, a company is chosen and a budget is established. Budgets can vary greatly based on profile of the community: the type of amenities, the amount of open space and whether it is a single-family, townhome or condominium community.
Rules and regulations, as well as a means to enforce them, are established. All of this is done before the sales office opens.
A board of directors is created, which comprises Town & Country staff who are directly responsible for community development.
The association becomes operable under the builder-controlled board of directors. The board manages and monitors issues and budgetary concerns as needed with the management company.
Once the community is 75 to 100 percent occupied, it turns it over to the homeowners. A transition meeting is scheduled by the management company 30 to 60 days out. A letter explaining what's going on and a request for individuals to run for the board is sent to the community homeowners.
When the transition meeting is held, a motion is made for the builder to step down and the homeowners take control. The new board is voted in. Town & Country Homes also holds a question and answer session with all attendees.
A follow-up meeting is scheduled between the new board and Town & Country Homes to go over outstanding issues and the budget.
Once Town & Country has relinquished control of the board, it's up to the new board to decide whether to retain the current management company, find a new one or manage the community themselves.

Blankenship says there is always something the new board doesn't like about the way the temporary board managed the association. He says that in some cases the new board may want to change certain rules and regulations; in other cases it's the way the budget was managed.

Says Blankenship: "In almost every case, it gets worked out and they move on."

Community Associations: A Force in American Housing

About 13 percent of residential housing in the U.S. is within some form of a community association.
There are currently 295,700 association-governed communities throughout the U.S.
More than 23.8 million housing units exist within association-governed communities in the U.S.
More than 58.8 million residents live in association-governed communities.
More than 1.7 million Americans serve on a community association board, with close to 400,000 participating as committee members.
The estimated real-estate value of all homes in community associations is close to $4 trillion, approximately 205 of the value of all U.S. residential real-estate.
Community association boards maintain investment accounts of more than $35 billion for the long-term maintenance and replacement of commonly held property.
Some of the largest community-managed associations in the U.S. are in Columbia, Md.; Reston, Va.; Valencia, Calif.; Summerlin, Nev.; and Highlands Ranch in Highlands, Colo.

Source: The Community Associations Institute

Community Associations Institute — A Resource for Home Builders and Community Association Board Members

"For better and worse, the threat of litigation exists in almost every part of society, and the community association industry is no different," says CAI Spokesperson Frank Rathbun. But it doesn't have to be that way, he says.

"The more people understand and incorporate best practices, the less likely they are to encounter problems, some of which do have the potential for litigation. Best practices can help developers and homeowners avoid common mistakes," Rathbun says.

If they aren't already, home builders involved in the development of self-sustaining communities might want to become familiar with the Community Associations Institute and its foundation.

"Those who take advantage of CAI and foundation tools and resources will put themselves in a better position to create, inspire and sustain better, more effective communities," Rathbun says.

CAI is a national membership organization "dedicated to fostering vibrant, competent, harmonious common-interest communities." It provides education, tools and resources to people who govern communities and the professionals who support them.

The Foundation for Community Association Research supports the CAI. The foundation is a non-profit organization that conducts research, educates and offers other resources for those involved in residential community association governance and management.

Anyone interested in CAI resources or membership can call their toll-free number, 888/ 224-4321, or visit its Web site at www.caionline.org.

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