CAI-NJ November 2020

The Financial Impacts of Transition By Michael Mezzo, CPA, WilkinGuttenplan

N ewly built condominium and homeowner’s asso- ciations can offer many perks and amenities for potential buyers. Brand new clubhouses and homes can be very appealing for buyers looking for a fresh start. However, as with most things in life, shiny new things usually come at a cost. Newly built associations have a unique set of financing hurdles that they must manage in order to ensure a successful future. Most of these hurdles stem from the process of “transition”. Within this article, we will take a deeper dive into the transition process and highlight keys to help ensure a successful transition. The life cycle of all communities begins with the builder (i.e. the “developer”). During the initial years of operation, the developer will maintain full control of the site. This con- trol includes making all financial and operational decisions related to the maintenance of the site. During this time, the developer will be responsible for setting the annual main- tenance fee, determining the annual reserve contribution, and preparing an annual budget. As time goes on and more units close, the developer will eventually relinquish ownership of the site to the unit owners. This transfer of ownership if what we refer to as “the transition process”.

For purposes of our discussion, we will focus on two of the more prevalent areas of the transition process: 1) the devel- oper’s funding obligations during their time of control and 2) determining whether there are any construction defects which require repair. Once ownership of the site is transferred to the unit own- ers, the new board will begin the process of reviewing whether the developer provided adequate financing for the site during the time which they maintained control. The “Planned Real Estate Development Full Disclosure Act” includes a detailed description of the funding requirements of a developer. Each developer is responsible for reviewing this legislation, along with any additional state regulations, and determining what they believe their funding obligations to be. Most commonly, developers will elect to either fully fund the reserve fund for all completed components, pay for maintenance fees on all unsold units, or fund any operating deficits during their time of control (exclusive of bad debts). However, it is important to remember that these decisions are unique to each individual site. While undergoing tran- sition, it is important for unit owner boards to obtain a thor- ough understanding of the funding requirements as detailed CONT I NU E S ON PAGE 16

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