Question: I am serving on the Board of Directors of my community association and this is a critical time for us. We are a new community facing a transition from developer control. What steps -- legal and practical -- should we take so that this process will be successful?
Answer: In the past two years, there has been an explosion of new community associations -- especially condominiums. These associations are as small as 4 units, and often larger than 200 units. But the process of transition is important regardless of your size.
Many new community association owners are first time buyers. They have never owned any real estate and have no business experience whatsoever.
But many associations are big businesses, with budgets in the millions of dollars. Unless owners get involved, learn the process, and hire competent professionals, your association may be headed for disaster -- both financially as well as emotionally.
Service on a community association Board of Directors is a thankless job. The hours are long and there is no pay. But if you want to make sure that your investment (your home) will not be wasted, you may want to seriously consider putting your "hat" in the election ballot and consider running for a board of director position..
Although many owners do not understand this, when the very first home in a complex is sold, the association is already in existence. The developer usually selects the first board of directors, which controls the association until turnover of control is accomplished. In general, the laws in the surrounding jurisdictions 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. The turnover requirement should also be spelled out 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 may take a long time to get back on track. And, unfortunately, some associations never succeed.
Unfortunately, many developers do not understand the importance of working with owners so that they can property and effectively manage their own association. It is not acceptable 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. Owners are new to the complex and do not know one another. They are reluctant to vote someone into office without knowing who that person is or what that person stands for.
You can take the lead and arrange for 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 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. Some developers will even front some seed money so that the "rump" association will be able to hire an attorney and other professionals to assist them at the earliest possible time.
At some point in time, the developer will schedule a meeting of owners. The purpose of the meeting will be to elect a new board of directors. Your Bylaws most likely require that a formal notice must be sent to all owners advising them of the meeting and the pending election. This will give owners the opportunity to campaign for seats on the board. In my opinion, a community association is a mini-democracy. We have 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:
• Select a management company: The new board must decide whether to retain the existing management company -- which had been selected by, and may be too loyal to, the developer -- or select a totally independent management 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.
• Audit the books: An independent auditor or a certified public accountant must examine the association's books. It is important for members of the new board to satisfy themselves (and the owners they represent) that during the time 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 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 comprehensive collection policy that will be applied uniformly. I am a strong believer in a "zero tolerance" policy when it comes to delinquencies.
• Retain Legal Counsel: 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 very well be as large -- if not larger -- than many commercial businesses in the Washington metropolitan area.
• Physical Inspection of the Property: The board should consider hiring an engineer to inspect the complex as soon as possible. The engineer should determine whether there are any warranty defects or 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. This is known as a "reserve analysis study."
• The professional engineer determines the useful life of the major components in the complex (eg. the roof, elevator, and other common areas), and the projected cost to replace at the end of its life. On an annual basis, sufficient funds should be placed in reserve, so that when the component wears out, there will be enough money in reserve to pay for its replacement. Otherwise, each owner may be faced with a large special assessment. In the words of a TV commercial: "pay now or pay later."
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 auditing the developer's activities.
Good dialogue among unit owners, the developer and board goes a long way toward creating a successful association. It's hard work to be on a Board of Directors, but your home is your investment and you certainly want to protect it as best you can.
