QUESTION: I am a unit owner in a medium-sized condominium. The developer has indicated a willingness to turn over control to the unit owners, and a few of the owners in the building have started to plan for this transition. However, we really are in the dark on how to proceed, and would like your thoughts on this issue.
ANSWER: At some point in the development of a condominium, whether or not required by local law, a developer will relinquish control of the condominium to the unit owners. When a condominium is established, the association comes into being at least when the first unit is sold. The developer appoints the initial board of directors, which usually consists of friends, relatives, and employes of the developer. Clearly, the object of this initial board of directors is to keep control of the condominium associaiton in the hands of the developer. This makes good sense while the developer is trying to sell units in the complex.
However, at some point unit owners want assurance that they are in control of their own destiny. The various jurisdictions in the Washington metropolitan area have laws dealing with when control is to be turned over to the unit owners. For example, in the District of Columbia, unelss the project is an expandable condominium, a developer must turn control over to the unit owners when either 75 percent of the units have been sold or two years pass from the sale of the first unit, whichever is earlier. In an expandable condominium, the time limit is three years.
But turning over control is not a simple matter. You cannot just attend a meeting called by the developer and then walk away saying, "We now control this condominium."
Competent management companies and good developers will plan ahead to accomplish a smooth transition between developer control and unit owner control of the association.
Here are a few areas which should be kept in mind:
* Election of directors. If your condominium is like most others, you probably will have met a few of the other unit owners in the project. But you certainly do not know all of these owners, and probably do not have enough information on which to elect a board of directors who will govern your life for at least the next year. It is important to establish a nominating committee (which can be done with the cooperation of the developer) and have an open forum one evening for potential candidates to the new condominium board of directors.
As this column has discussed on numerous occasions, a condominium is a mini-democracy, and candidates for board of directors of a condominum should mount campaigns similar to those for the recent elections for public office. A nomination procedure should be established so that, when the time comes to vote for the directors, the procedure will be understood by all, and the candidates will have had an opportunity to make their views and personalities known to the other unit owners.
* Management company. The developer has contracted for a management company. The new owners will have to decide whether to retain the same management company for the future. However, it is strongly recommended that you use the services of the existing management company to assist you in the transition period. After all, the management company -- although initially selected by the developer -- certainly would like your business, and may bend over backwards to cooperate with you.
A lot of important notices will have to go to all of the unit owners, and it is reocmmended that a core group of unit owners meet with the developer to establish the procedures for the transition. Some developers will be more than willing to cooperate, and will let the management company work with the unit owners. Other developers will be reluctant to assist in this process. And thus, the management company also may be reluctant to cooperate. If this is the case, you may have to take it upon yourself to send out the necessary notices, and to make the arrangements for the election.
Transition audit. Although the developer has been in control of the condominium association, there is a responsibility to keep the books and records of the association in good condition. The legal requirement is to maintain the books and records in accordance with general accounting principles (known in the trade as GAP).
When condominium unit owners take over control, they want to assure themselves of a proper accounting for all the income and expenses of the association. For example, while the developer was in control of the association, did the developer pay the condominium fees for the unit he or she still owns? Were expenses legally owed by the developer inadvertantly (or purposely) paid out of condominium association funds? Were reserves established? Were surplus funds (if any) put in interest-bearing accounts?
These are very serious matters, which must be analyzed immediately on turnover of control. As indicated earlier, a good developer and a competent management company already will have hired an independent accounting firm to audit the books and records. If such an audit has not yet been accomplished, suggest to the developer that an audit be done before control is turned over.
Although it is not crucial to defer control until an audit has been completed, if time permits, I strongly recommend an audit before you take over control.
These are but a few of the very important issues involved when any homeowner association takes over control from the developer. It takes a lot of patience and a lot of work. However, in the long run it is better to plan ahead than face a later crisis.