DEAR BENNY: 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 this process will be successful? – Sally
DEAR SALLY: This is a very important issue so my answer is rather long. Many new community association owners are first-time buyers. They have never owned any real estate and have no business experience.
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 I suspect you decided to be a board member because you want to make sure that your investment – your home – will not be wasted.
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 it is turned over to owners, a time period determined by most states. The turnover requirement should be spelled out in your association’s governing documents.
Transition between developer control and owner control of an association is perhaps the most important step: if done poorly, it may take a long time to get back on track. Some associations never succeed.
Many developers do not understand the importance of working with owners so that they can properly 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. Once you learn who is interested in taking an active role, contact the developer and ask for a preliminary meeting to ask questions and raise concerns. Your group should try to pin the developer down as to when control will be turned over. You should also discuss whether the developer intends to be helpful during the transition or just 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.
The developer will schedule a meeting of owners to elect a new board of directors. Your bylaws most likely require that a formal notice 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 associations.
Once the owners are in control, there are four mandatory steps that must be taken by the new board:
1. 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 an independent management company. The association may decide to forego hiring such a company and become “self-managed,” but I do not recommend this. An association containing a large number of homes needs professional management.
2. 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 money collected and all expenses paid have been properly accounted for. While the developer is in control of the association, the developer also has access, often unlimited, to the association funds. You want to make sure that funds which should have been paid by the developer were 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, the developer may have allowed owners to become seriously delinquent in paying their 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.
3. 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 from developer problems – such as warranty and other transition issues – to assisting in 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 actually be as large – if not larger – than many commercial businesses in your area.
4. 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, known as a “reserve analysis study.” The professional engineer determines the useful life of the major components in the complex – such as roofs, elevators, 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 to pay for its replacement. Otherwise, each owner may be faced with a large special assessment.
Good dialogue among unit owners, the developer and the 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.
Benny Kass is a practicing attorney in Washington, D.C. and in Maryland. He is not providing specific legal or financial advice to any reader. He wants readers to e-mail him, but cannot guarantee a personal response. He can be reached at: [email protected].