Published on: June 26, 2018
By V. Douglas Errico
Condo developments have three phases, equivalent in the minds of many developers to the “stages of grief” that describe the mourning process. There is no question that construction glitches, quarrelsome owners, litigation, or the threat of it, that plague some projects can make many developers mourn their career choice. But the development process doesn’t have to be grievous. There are common sense steps developers can take to avoid many of the headaches and reduce many of the risks they encounter in each development phase.
I’ve compiled the following suggestions based on more than three decades representing developers, but they come with an important caveat: These are general recommendations, not hard and fast rules. They will apply to most developers and most development projects, but they won’t be equally appropriate or equally effective for all of them.
PHASE ONE: CONSTRUCTION
Avoid construction defect suits. Most disputes with owners – certainly the most difficult and most costly of them – involve construction defects. The obvious way to avoid these conflicts is by avoiding construction defects. This isn’t intended to be snarky or disingenuous. Developers don’t intentionally construct flawed buildings, and until someone figures out how to build a perfect structure, every building is going to have some imperfections. But you can reduce the likelihood of devastating structural defects – the kind that require substantial repairs or reconstruction – by working only with contractors and subcontractors you know and trust. Select members of your construction team based on the known quality of their work, not on their promise to do it for the lowest price.
The product you build will only be as strong as the weakest link on your team. Even contractors you know and trust will need some level of consistent oversight. President Ronald Reagan’s admonition to “trust but verify” definitely applies. Having the project architect or engineer monitor major components of the work will increase the likelihood of identifying problems before they have been baked into a finished structure.
Sweat the small stuff. Even in the largest project, the smallest details matter. The loose doorknobs, sloppy painting around baseboards, faucets that aren’t set properly may seem like minor blips on the radar screen of a developer’s multimillion dollar project, but they will be the things owners notice most after they move in. And many owners will form an impression of the overall development based on these small flaws. If you haven’t focused on the small details, they may wonder how much attention you have paid to the larger ones. On the other hand, if you have been conscientious about small details, owners will assume you have been equally careful about the big ones.
Be patient. Owners can be demanding and aren’t always courteous; developers and their staff should be unfailingly polite, respectful and reasonable, even if owners are not. A little bit of the ‘customer is always right’ philosophy will go a long way toward keeping relations with owners on a positive track.
Respond quickly to owners’ complaints. It is difficult to pull workers off of a new project to do touch-up work on one you’ve finished, but the good will you create by correcting small problems quickly will carry over if you have to address much larger ones. Don’t quibble about small repairs even if you don’t think it’s your responsibility to fix them. If you fight over 100 small things, positions will become hardened, negative attitudes will become fixed, and the chances of working out a compromise on a big problem will be slim. Do what you say you’re going to do when you say you’re going to do it, do it well and do it willingly. This is all part of creating trust. The trust you build with owners is like the foundation of your building; you want it to rest on bedrock, not on sand.
PHASE TWO: DEVELOPER CONTROL
For some period – usually two to three years and possibly much longer – developers will play two roles in a condominium development:
- Completing and marketing the development; and
- Overseeing the community’s operations and finances
These roles will not align perfectly; some conflicts are inevitable. How developers manage them will determine whether their relations with owners are friendly or fraught, and will do much to determine the success of the condominium project and of the condominium association the owners will eventually control. Although developers, condominium communities and the owners living in them will differ, these suggestions will apply to all of them:
- Create a realistic budget. Marketing consultants and real estate brokers will insist that you have to keep operating costs and common area fees low to sell your units. Ignore them. The budget you create should be designed to cover the association’s reasonable – not extravagant, but reasonable – operating expenses. It should not be designed to lure prospective buyers with appealing but misleading expectations about their ownership costs. If you low—ball the budget by creating a fee structure that can’t possibly sustain the community, you will be setting the association up for financial problems and setting yourself up for law suits alleging intentional misrepresentation or breach of the fiduciary duty you had while in control of the association to manage it prudently.
- Don’t comingle funds. When you control the association, you control its checkbook, but that doesn’t mean you can use association funds in any way you choose. The revenue generated by owners’ common area fees can be used only to pay the community’s operating expenses. You can’t use association funds to complete the sprinkler system you were supposed to install or to fix defects for which you are responsible. And you certainly can’t use association funds to finance work on another development. The law in this area is clear and the penalties for violating it are severe.
- Name an entity, not an individual, to serve on the board. Developers who name themselves or employees as trustees risk personal liability. There is no reason to do that and every reason not to.
- Hire a professional management company. Experienced developers know how to create a successful condominium project; most do not know how to manage a condominium community. You should hire a professional manager to do that for you. Let the managers pay the bills, hire the vendors, arrange for the landscaping and handle the day-to-day operations and its attendant headaches. They will almost certainly be better at it than you and will free you to concentrate on what you’re supposed to be doing- completing the project and selling it. A professional manager may also identify problems you won’t see or may not recognize as quickly. The management fee will increase owners’ costs, but owners are probably going to have to hire a manager anyway; this will get them used to the expense and demonstrate why professional management is necessary.
- Give owners a voice in association governance. This isn’t required and it may not be a good idea in some communities, but it is usually a good idea in most. You can accomplish this informally by soliciting owner feedback on specific issues and by inviting them to offer suggestions or express concerns. Or you can create an advisory committee to provide that input in a more formal way. This won’t undermine your control – you’re giving owners a voice, not a vote. But it will create a channel of communication through which you can keep owners informed and identify their concerns. The advisory committee can also provide a training ground for the trustees who will serve on the board when owners assume control of the association. Reach out to owners you’ve identified as reasonable and level-headed. If there aren’t any who meet that definition, then the advisory committee won’t be a good idea. It also won’t work if a developer is thin-skinned, defensive, and/or disinclined to listen to owners or to consider any suggestions they make. Don’t create an advisory committee unless you think owner input can be valuable and will treat it that way.
- Don’t overstay your welcome. The bylaws will specify the period for which the developer can maintain control. Don’t exceed that term and consider exiting sooner if you can. You want to control the budget and operating decisions for long enough to ensure the project’s success – but no longer. The longer you maintain control, the greater the likelihood that owners will find fault with the decisions you are making, and the greater the risk that they may sue you for breaches, real or imagined. One very real risk: Owners may contend that you are hanging on only to sweep problems under the rug or to run out the clock on the statutes of limitations and repose to avoid being sued for construction defects. That may not be true, but you will still have to deal with the litigation or the ill will that might give rise to it.
PHASE THREE: TRANSITION AND BEYOND
Prepare owners for transition. Like creating an advisory committee, preparing owners to assume control of the association isn’t a requirement, but it is one of the “best practices” industry executives recommend. Provide the association documents they need (and to which they are entitled); answer their questions; suggest resources (such as CAI) that may be helpful to them. The transition process will usually be easier if you have been working with an advisory committee because its member will be familiar with association governance and, equally important, they will probably feel comfortable working with you.
Follow the association documents. Hold an annual meeting and the election of an owners’ board when the documents indicate. Ask the advisory committee, or individual owners, if you don’t have a committee, to help organize the meeting. You should begin the planning process several months in advance.
Encourage moderate, level-headed owners to run for the board. You want to leave the association in the hands of people who are likely to do a good job of running it.
Host the meeting. Many developers pay for the meeting room if the community doesn’t have one, bring in food, and even pay for an attorney to be available to answer owners’ questions. This has the practical benefit of facilitating the meeting and the election of an owners’ governing board, but it is also another good will gesture, and in the relationship between condo developers and owners, you can’t have too much good will.