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HOA Transition Tips: Moving from Developer to Owner Control
The transition from a developer-controlled to a homeowner-controlled community is fraught with risks for homeowners. "If it's not done right, the incoming board elected by the members could be left with a huge mess on their hands," says Michael S. Hunter, an attorney and partner at Horack Talley in Charlotte, N.C. "I've seen situations in which common areas weren't deeded over to the association, or they were deeded over, but the developer hadn't paid the property taxes for several years before handing them over."
"A rocky transition can lead to missed deadlines to bring claims against the developer and its contractors for defects, along with a poor start among homeowners in learning how to live in a communal environment," adds Sima L. Kirsch, a principal at the Law Office of Sima L. Kirsch P.C. in Chicago, "which I believe starts during this period."
If your board is about to take over from your developer or has recently done so, here are tips for making sure the transition goes as smoothly as possible.
1) Act early. "People are trained that the transition is a magical date and until that day, they can't do anything," says Kirsch. "But a transition takes 12-18 months. I recommend that the first person to buy should get the second person on board, and so on. They should bring in an attorney to talk to them and form a unit owners' group to work with the developer. When developers or their attorney see that kind of intent, they're much more willing to work through problems."
"Do the groundwork before the transition," agrees Hunter. "Appoint a developer's liaison committee so that when it comes time for the transition, you'll have four or five owners who already understand how the association operates."
2) Know your rights. "Read your CC&Rs," advises Justin D. Park, an attorney at Romero Park & Wiggins P.S. in Bellevue, Wash. "They specify the transition powers of your developer, and there's usually a specific date in them for the developer to step back and for the board to step forward." That's not always true, however. Park litigated a case in which the CC&Rs failed to include a transition date, so the developer's responsibilities were debatable because it wasn't clear when the transition had taken place.
3) Meet often. "During the transition period, the board needs to meet at least every week or every other week," says Park. "The board has total authority to make changes to the developer's rules and regulations, so it has to review every one to decide whether to jettison any of them." Why might you need to change some rules? Because they're often not written for long-term happy living but to help the developer sell units. For example, the developer may have implemented a bare-bones budget to kept assessments low, allowed pets, or placed no restrictions on parking, all to attract buyers. Your board, however, may feel differently about those issues.
4) Get your arms around the funds. "Make sure you get accurate records from the developer," says Hunter. "Have a CPA perform a cursory review of the financial records, and look at the income statements to make sure the projected revenue will cover all the expenses and that they also provide an adequate reserve." Hunter has seen cases in which developers hadn't kept accurate accounting records, so it wasn't clear which owners had paid their assessments. He's also seen developers pay expenses out of their own pocket to keep assessments artificially low, along with developers who've failed to pay assessments for unsold condo units.
5) Review current contracts. Read all the contracts the developer has entered into on behalf of the association to determine whether they're necessary and reasonable. In North Carolina, for example, as long as they provide 90 days' notice, boards can terminate developer-signed contracts that are "unconscionable" or "not bona fide." "That generally means that for some reason, the contract isn't legitimate," says Hunter. "I've handled two cases recently dealing with that exact issue. In one case, the sales literature said the development had decorative streetlights, but the developer provided them by signing the homeowners association to a 10-year lease with the local power company. We threatened to sue the developer, and he's now kicking in money to purchase the lights."
6) Wrap up loose ends. In your effort to monitor the big things—like finances—don't forget the small stuff. "Appoint a new registered agent with the secretary of state so that if your association gets sued, you'll get notice," says Hunter. "I had a case in which the association got sued, and when the plaintiff attempted to serve the registered agent, that person couldn't be found because the developer had moved on. A default judgment was entered against the association. We tried to get the judgment vacated, but the judge told the association board that this was their problem because they didn't keep an updated registered agent on file."
Finally, don't go it alone during the transition. "Get a lawyer in place quickly to help you review the CC&Rs, to make sure you know when things are supposed to happen, and to make sure things happen properly," advises Park. "You may not need the lawyer to do much work, but have one available to answer your questions."
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