OP-ED: Tips for Developing, Transitioning Community Association Projects
Daily Journal of Commerce Oregon
Oregon residential developers have many factors to consider when constructing and later transitioning community association projects to a homeowners association or condominium owners association. There are various concerns to address at each phase of the project, from financing to turnover. Being mindful of these considerations and clearly stating the transition plan can make things easier for both developers and community associations in the long run. This article identifies a few helpful tips and issues to keep in mind when developing community association projects.
Obtain lender consent
Developers should gain consent from lenders for their proposed development and governing documents to ensure any lender lien is junior to the recorded covenants, conditions, and restrictions (“CC&Rs” or “Declaration”). This will ensure that the lots or units remain subject to the governing documents even if the lender forecloses.
Clearly identify the development plan parameters
Development plans need to be broad enough to consider numerous possible outcomes yet still inform eventual home buyers what they can expect in the project. Plans should include a non-exclusive list of development options and provisions for different situations, such as addressing a less-than-unanimous vote by owners to alter the anticipated project.
Consider the effects of partial completion in phased development
With projects to be completed in phases, it is essential to clarify developer privileges for future project phases, including access, required easements, and architectural control. Developers should consider building in flexibility for changing lenders, markets, and legal requirements. Phased developments should also allow for developer discretion in annexations or withdrawals and provide clear guidance for land not annexed.
Identify the timeline for developer control
Oregon allows unlimited time for developer control. However, specifying when lots, including unsold lots, become subject to assessment provides clarity for both the developer and home buyers. The need for developer control should be balanced against attractiveness to buyers and their lenders. (Oftentimes, turnover from the developer to owners occurs after 75 percent of the lots are sold, including those to be annexed.)
Explicitly reserve developer rights
Developers should reserve their rights in the Declaration and Bylaws for particular actions, including annexation, putting up “for sale” signs, maintaining model units, their right of access over common grounds, storage of construction materials, etc. Governing documents should preclude amendment of these rights without written developer consent.
Determine initial voting rights
The governing documents should specify voting rights since they may be subject to change as lots sell. For example, governing documents could specify initial weighted voting with Class A for owners and Class B for the developer, with Class B having three votes for each lot owned and veto rights over decisions of Class A members. In this example, the developer should also consider when Class B membership expires, such as when 75 percent of units are sold, if that is the case.
Determine funding for the initial HOA budget
Developers should consider the project’s long-term financial integrity and balance their need to maintain cost-effectiveness with the HOA’s initial need for the developer to pay assessments on both improved and unimproved lots. For example, will the developer be paying for or subsidizing initial expenses and performing maintenance responsibilities? Or will working capital be funded through initial purchaser contributions? Identifying the best practice for funding often depends on how quickly units are likely to sell.
Consider the project type and its impact
The project type will affect items covered in the governing documents. For example, specific maintenance agreements might be needed if townhomes are involved. If it is a mixed-use project, things like hours of operation and types of commercial uses need to be addressed.
Specify use restrictions and architectural controls
Restrictions and controls should be clearly stated to provide clear rights and responsibilities of the developer and owners. Additionally, developers should keep in mind that they will also need to be compliant with federal laws such as the Fair Housing Act and Communications Act of 1934, as well as state laws.
Consider entity formation requirements
In Oregon, a community association should be formed as a nonprofit mutual benefit corporation. The Articles of Incorporation should allow amendments by the association’s board of directors or by a simple majority of the owners so that any amendments do not violate the Declaration.
Ensure property sales comport with statutory requirements
Oregon property sales need to include purchaser protections as required by the Oregon Homebuyer Protection Act. Additionally, escrow instructions and deeds should be consistent with sale agreements and the governing documents.
Strive for uniform enforcement before turnover
A developer should strive to uniformly enforce the governing documents prior to the turnover meeting. This will help ensure that association rights are not waived due to lack of enforcement and avoid liability to later owners and the association for failing to require that initial owners comply. Uniform enforcement will also help ensure the project maintains a consistent character throughout.
Transitioning a project from a developer to a community association might feel complicated, but addressing these issues from the onset can help streamline the process and clarify the plan for all stakeholders involved.
This article summarizes aspects of the law and does not constitute legal advice. For legal advice for your situation, you should contact an attorney.
Column first appeared in the Oregon Daily Journal of Commerce on August 13, 2021.