Question: The developer in our community association is still building houses. There are rumors that the developer intends to turn over control of the association to the owners by the first of next year. What exactly does this mean? Do we, as owners, have any rights with regard to this turnover? Are there any steps we should begin taking now?

Answer: In any community association, decisions concerning the association are generally made by an elected Board of Directors. However, in a newly-developed association, since there are no owners who can elect Directors, the developer selects the initial Board members. Often, those directors are agents and employees of the developer, thereby allowing the developer to retain control of the association. All owner dues are paid to your association, but the developer -- through the Board -- controls the funds, sets the budget and makes the rules.

At some point in time, however, the developer is obligated by law to turn over control of the association to the owners. For instance, the laws in the metropolitan Washington, DC area generally require that control be turned over to the owners within so many years after the first sale, or when a certain percent of the homes have been sold, whichever comes first. Turnover requirement specific to your property can be found in your association's governing documents.

Transition between developer control and owner control of an association is perhaps the most important aspect of any community association. If done properly, your association will be off to a good start; if done poorly, it will take you a long time to get back on track.

Unfortunately, many developers do not understand the importance of working with owners so that they will be prepared to manage the association themselves. It is not good practice, in my opinion, for a developer merely to announce one day that a meeting will be held, at which time the owners will elect a new board of directors to govern and manage the association. Owners are new to the complex and do not know one another. They are reluctant to vote someone into office without knowing what that person stands for.

You should first call a meeting of the owners. Have it in the social hall, a nearby church or school, or even in someone's home. Once you learn who is interested in taking an active role in the association, contact the developer and ask for a preliminary meeting for the purpose of asking your questions and raising any of your concerns.

You mentioned that you have only heard rumors. You and your group should try to pin the developer down as to when control will be turned over. You should also discuss the level of cooperation which the developer will give you during transition. Find out whether the developer intends to be helpful, or will just "wash his hands" and walk away.

At some point in time, the developer will have to schedule a meeting of owners. The purpose of the meeting will be for the owners to elect a new board of directors. I find it curious that owners are often asked to vote for members of a board that will control their own destiny without having any information on who these prospective members are or what they stand for.

If possible, a notice should be circulated to all of the owners advising them that there will be a meeting before the election, at which time people can campaign for seats on the board. In my opinion, a community association is a mini-democracy. There are political campaigns for government officials; we should also have campaigns for directors of community associations.

Once the owners are in control, there are four mandatory steps that must be taken by the new Board of Directors:

1. Management: The new board must decide whether to retain the existing management company -- which had been selected by the developer -- or select a totally independent company. The association may decide to forego hiring such a company and become "self-managed", but I personally do not recommend this. An association containing a large number of homes needs formal and professional management.

2. Financial Audit: An independent auditor or a certified public accountant must by retained to examine the association's books. It is important for members of the new board to satisfy themselves (and the owners they serve) that while the developer was in control of the association, all moneys collected and all expenses paid have been properly accounted for.

Keep in mind that while the developer is in control of the association, the developer also has access to the association funds. Often, this access is unlimited. You want to make sure that funds which should have been paid by the developer are not inadvertently (or purposely) paid out of association proceeds.

Developers handle the question of payment of fees for the homes they still own in different ways, but under any circumstances, the developer must be held accountable for all its legitimate obligations. Additionally, in many instances the developer, while serving as a board member, may have allowed many owners to become seriously delinquent in paying their association fees. The new board must establish a careful and comprehensive collection policy that will be applied uniformly. I am a strong believer in a "zero tolerance" policy when it comes to delinquencies.

3. Legal: The association should retain a lawyer knowledgeable about community association laws. The lawyer will have to handle a wide variety of issues, ranging from developer problems -- such as warranty and other transition issues -- to assisting the association in its day-to- day activities. A community association is not only a mini-democracy, it is also a business, and must function in that capacity as well. Your association has many owners; your annual budget may be as large -- if not larger -- than many commercial businesses in your local area.

4. Structure: The board should consider hiring a structural engineer to inspect the complex as soon as possible. The engineer should determine whether there are any warranty defects, code violations, or other problem areas which should be called to the attention of the developer. The engineer can also help the board determine the proper level of reserves that are needed for future repairs.

In too many instances, the developer low-balls the initial operating budget, in order to make the project more desirable to prospective purchasers. However, once these prospects actually purchase, they sometimes realize that their association fees will have to significantly increase in order to be able to maintain the level of services they want -- such as security guards, health club or swimming pool.

Turnover of developer control is the most important aspect in determining the future success of a community association. It is not often understood by developers. Indeed, some developers do not want to encourage active participation by the new board for fear that this new board will be too conscientious in reviewing the developer's activities.

Good dialogue and careful advance planning among unit owners, the developer and board goes a long way toward creating a successful association.

For more articles by Benny Kass, please press here.

Published: July 16, 2001

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