Transition webinar 072414

Transition : Problems and Solutions Mitchell H. Frumkin, PE, RS, CGP

President, Kipcon Inc.

mfrumkin@kipcon.com

800-828-4118

copyright Kipcon Inc. 2014

Who am I ?

Mitchell H. Frumkin PE, RS, CGP

Past President CAI National

CAI National Research Foundation

NJ Chapter CAI

Chair Joint CAI/NAHB Task Force during…

Development of the Best Practices Report on “Transition”

Instructor, CAI M-370 advanced level course, “Managing Developing Communities”

Chair CAI National Reserve Professionals Committee during…

Development of “National Reserve Study Standards of the Community Associations Institute”

Development of “Reserve Specialist (R.S.) Designation

Author: Reserve Funds: How and Why Community Associations Invest Assets (CAI)

What I will be talking about

What is Transition

Key Concepts

Why does it exist

Typical issues

What are the dangers

How to prepare

Cutting edge strategies

What is it ?

Transition is the process which starts when it is decided to construct a community association and continues to the point in time when the Developer has no more seats on the board and all of the homes are sold.

There are 4 phases of Transition Document Development

The legal creation of the community association in which the master deed, bylaws, budget and design drawings are prepared

Construction.

When the building of the community occurs

What is it ?

Turnover

the point in time when the new Homeowners take control of the community. It typically occurs when 75% of the homes have sold.

Post Turnover

The time when the Homeowners have taken control of the community

To Summarize the Transition Process

Begins when the decision is made to build a community association

Ends after the sale of all homes have been sold and the new homeowners are in charge of the association

Why does it occur ?

The Transition process evolved with the development of the first community associations. The purpose is to provide a mechanism for the Sponsor to turn over the community to the new Homeowners as they move into the new community.

The difference is that you inspect after you buy !!

Some Key Concepts General Common Elements

For use of all owners .

Replaced and maintained by the Association.

Some Key Concepts Limited Common Elements

For the exclusive use of individual owners .

Replaced and possibly maintained by the Association.

Some Key Concepts

Common and limited common elements are important to the Developer because they :

Delineate the areas of responsibility for the Association and establish the risk areas for the Developer

Some Key Concepts

Common and limited common elements are important to the Association because they :

Delineate the areas of responsibility for the association

Some Key Concepts

Currently there are approximately 328,500 community associations in the US and growing fast

Make up approximately 24 % of all residential homes

Make up approximately 80% of all new homes

For more info see the “Community Association Factbook” at caionline.org

Some Key Concepts

Condominium

Approximately 50-55% of all associations

Approximately 75% of all units

Primarily multi family attached

Purchaser owns Air space within the unit

Percentage interest in common elements

Common elements include the buildings, site and amenities

Some Key Concepts

Planned Community (Fee simple, HOA, PUD, etc.)

Approximately 40-45% of all associations

Primarily single family detached

Purchaser owns Building (interior only)

Lot which the building sits on

Percentage interest in common elements

Common elements include site outside of the lots and amenities

Some Key Concepts

Cooperative

Approximately 5- 7 % of all associations

Primarily high rise

Purchaser owns A shared interest in the corporation

Exclusive right to rent or occupy a specific portion of the cooperative, usually called an apartment

Some Key Concepts

Hybrid

Combination of various types of associations

Mixed which includes various uses within the associations such as residential and commercial

Some Key Concepts

Reserve Study

A budget planning tool which establishes a funding plan to offset future major common area replacements

Some Key Concepts

Types of Reserve Studies

At Development of Governing Documents Full

During Turnover Full

After Turnover Update with site visit

Update without site visit

Reserve Study Webinar August 20 !

Some Key Concepts

Common Elements

Maintenance

Reserves

Budgets

Governing

Documents

Understanding the

Interrelationships

Between

Roles of the Developers Engineer

Design the community (engineering plans and specifications )

Peer Reviews of : Governing documents

Design documents

Promotional literature

Preparation of Budgetary items Reserve Study

Maintenance Schedule

Energy Cost Analysis

Quality Control Inspections During Construction

Operating Manuals

Roles of the Associations Engineer

Prepare a Transition Study

Goal : To assure general conformance with the plans and specifications if a new community. TO assure general conformance to the disclosure documents if a conversion

Prepare a Reserve Study

Goal : To confirm the adequacy of the initial budget

Prepare a Transition Study

The purpose of the Transition Study

Identify areas Not in conformance with the design documents

Architectural and Engineering Plans

Specifications

Governing documents

Not in conformance with good workmanship

What are the Standards ?

Building codes IBC, IRC, etc.

Performance Standards Regulations Governing New Home Warranties and

Builders Registration

Manufacturers literature

Typical Scope of Work

Review of design documents

Visual observations of as built construction common elements

sampling of the limited common elements

Report preparation

Meeting w client

Code Analysis

Typically does not include a code review based on the assumption that the design is code compliant

If the as built condition does not match the design drawings a code review is performed to determine if the change violates the code

Additional Services

Invasive testing

Cost estimate

Remedial designs

Meetings and walkthroughs

Litigation/ADR support

Additional Services

Update Reserve Study

Preparation of design and specifications for Upgrades

Replacements

Additions

Repairs

Contract Administration

Purpose of Reserve Study

Establish a Funding Plan which adequately offsets future major repairs and replacements

Determine whether adequate funding has been provided

What Are The Risks ?

What are the risks?

Deficient construction

Inadequate budgeting

Why are the risks so high

Homeowners expectations

Lack of education Developer

Homeowners

Poor Construction

Poor document development

Examples of Risk

Deficient Construction

Inadequate Detailing of Critical Areas

As Built Construction Does Not Match Design Drawings

Unclear Detailing of Critical Areas

Poor Workmanship

As Built Construction Does Not Match Design Drawings

Improperly Installed Flashing

Invasive Testing

Use of Hard to Install Materials

Lack of Coordination Between Architectural and Engineering Drawings

Budgeting problems

Inadequate Reserves

Common Types of Budget Deficiencies

Lack of coordination between between the design and the budget

Quantities do not match drawings

Maintenance is not adequately funded

Unit costs are developer costs

POS Reserve Study is prepared prior to the completion of the design drawings

As built construction does not match design drawings

POS Reserve Study not prepared by qualified person

Common Types of Budget Deficiencies

The use of high maintenance materials which deteriorate quickly and are not reflective of the useful lives in the Reserve Study

Common Causes of Budget Deficiencies

POS Reserve Study prepared prior to completion of design drawings

As built construction does not match design drawings

POS Reserve Study not prepared by a qualified firm

Perfect Result of Studies

No construction deficiencies

No budgetary deficiencies

Most common problem

Unrealistic expectations

Setting expectations

There is no such thing as perfect construction

The Developer did not build it wrong on purpose

If the process is guided in a non confrontational way it will most likely stay non confrontational

Remember….it is not uncommon for minor deficiencies to exist

But…. If problems do exist, they should be reported objectively

Typical solutions

Correction of problems

Money to have work completed by association

Contribution to reserve fund

Transition Study Should Include

List of all deficiencies and the applicable standard with specific references.

Design drawing and detail

Code and section

Manufacturers detail

Performance standard and section

Location of deficiency

A format which will easily allow an item by item response

Agree and will correct

Do not agree and reason

Could not find

Equivalency

Evaluate all claims for Strength

Strong Deviation from code

Deviation from design if not equivalent

Safety

Weak Deviation if equivalent

Minor drainage even if it exceeds standard (what is the damage ?)

Cost Estimates

Do not prepare a cost estimate until after response to the report is received

Avoid setting unrealistic expectations

After prepared make a business decision based on the cost to litigate vs. the cost to repair

If you must litigate be prepared

Cost estimates

Expert reports

Invasive testing

Photographs

Presentations

Etc etc

Transition Team

Sponsor

Manager

Attorney

Accountant

Engineer

The Dangers $10,000,000 construction claim

A real life example

The Dangers

Community association files suit against Developer

Developer retains legal counsel and expert

Expert report agrees with claim but does not agree with cost

Developer third parties into the case 20 subcontractors who all report the claim to their insurance companies who each retain attorney on behalf of the subcontractor

A real life example

The Dangers The costs so far to pursue a $10,000,000 claim

Association legal expense $1,500,000

Association engineering expense $1,500,000

Total Association expense $3,000,000

A real life example

The Dangers

Developer costs

Attorney, $1,000,000

Expert $500,000

Third party costs

50 days of depositions x 25 attorneys x $400/ hour x 8 hours / day = $4,000,000

A real life example

Mediation

Third party reviews of reports

Education

Communications

RFP for Transition Studies

Evaluate all claims for their strength

RFP for Transition Study All claims must indicate

Locations

Standard

Deviation from drawings

Workmanship

Equivalency

Think about what is going on with a business view and DO NOT make it personal !

A Note on Conversions

Construction is not new

Design drawings are generally not available

Disclosure documents are the basis of the reports

Some References

Thank You and any questions ?

Please e mail any questions that have not been answered and for copies of any of the references.

If you would like this presented to your community of company directly, please let us know

Reserve Study Webinar 8/20

Mitch Frumkin

mfrumkin@kipcon.com

Proposals

Kipcon.com

800-828-4118

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