We are now beginning to see the effects of the recently implemented changes in the Planned Real Estate Development Full Disclosure Act of New Jersey brought about by the efforts of the Community Association Institute, NJ chapter. Amongst other things, these changes impact the budgeting and developer responsibilities for associations that have filed their public offering statement after July 1, 2021. While we have known that these changes would be coming and their related financial impact on these newly developed associations, it typically takes significant time between public offering statements to initial construction and the implementation of these budgeting rules.
With the year-end 2022 audits, we’ve begun to see some developers and associations must comply with these rules.
While the previous rules relied on a calculation of benefits derived, the new act stipulates that the developers are responsible for the registered and unsold units; there have been some conversations on what precisely a registered unit is, especially in multi-phase and multi-building associations, where some of the registered units may be years away from actual construction. The calculation now differentiates the fixed and variable costs and how these costs are to be allocated to the developer and unit owners.
Depending on the type of costs, the allocation may be different.
In the past, the developer was required to prepare a budget one time and include it in the public offering statement. That static document would be the referral source through the full development of the association. Now, developers are required, in conjunction with management, to prepare a budget annually in which they estimate the number of units that will be sold during that calendar year, and based on that, the developer pays their share of maintenance fees monthly, just like all the unit owners.
The new act also calls for analyzing any deficit created during the years of developer control, and there is now an option. Depending on the cause of the deficit, the sponsor and all unit owners can be charged ratably, which was not always the case in the past. Along that same line of thinking, delinquencies are now budgeted for annually. These budgets are expected to have a 3% delinquency allocation, which is charged to both unit owners and the developer based on ownership.
The last change in the act that we will cover is replacement funding. In the past, many developers, during their development period, would not consistently update the replacement studies; similarly, the replacement fund’s funding was up to each developer’s interpretation.
This new act formalized the requirement for the replacement study to be updated within the industry standard of 3-5 years and set the expectation that the funding of the replacement fund should be under one of the three standard methodologies, the most common one being the threshold methodology.
This new act brings some consistency to newly developed Community Associations within New Jersey, allowing both unit owners and developers to have a clearer expectation of their overall financial obligation to the association during the development period. It brings the unit owners and the developer together early in the process. As with any new change in legislation, some final kinks are still being worked out; however, it would seem that this fresh approach to developer obligations has been well received by unit owners, developers, and property managers.
If you have any questions, please contact your WG business advisor.