Q: We live in a community where the developer still is building. We have heard rumors that he intends to turn over control of the association to the owners by the end of October. 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?
A: Although many owners do not understand this, when the first house in a complex is sold, the association already is in existence. The builder, who develops the association, then retains control of the community association until a large number of houses are sold. This means that the developer's people are on the board of directors of the association. All owner dues are paid to the association, but the developer, through the board, controls the funds, sets the budget and makes the rules.
At some point, however, the developer is obligated by law to turn over control of the association to the owners.
Transition between developer control and owner control is perhaps the most important point in the life of any community association. If the transition is orchestrated 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.
In general, the laws in the jurisdictions surrounding Washington require that control be turned over to the owners within so many years after the first sale, or when a certain percentage of the houses have been sold, whichever comes first. The turnover requirement will be specifically spelled out in your association's governing documents.
Unfortunately, many developers do not understand the importance of working with homeowners so 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.
Although the developer-initiated meeting to elect a new board will eventually have to take place, as a rightfully concerned homeowner, you might first call a meeting of the other owners. Have it in the social hall, a nearby church or school or even at someone's house. 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 concerns.
You mentioned that you have only heard rumors. You and your group should try to pin down the developer as to when control will be turned over. You should also discuss the level of cooperation the developer will give you during transition. This way you'll 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 himself will have to schedule a meeting of owners. The purpose of this 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 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 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. 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 steps that must be taken by the new board:
* 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 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.
* The new board must decide whether to retain the existing management company, which had been selected by the developer, or select an independent management company. The association may decide to forgo hiring such a company and become "self-managed," but I do not recommend this. An association containing a large number of homes needs formal and professional management.
* 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.
* 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 that 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.
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. 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 among unit owners, the developer and board goes a long way toward creating a successful association.
Kass is a Washington lawyer. For a free copy of the booklet "A Guide to Settlement on Your New Home," send a self-addressed stamped envelope to Benny L. Kass, Suite 1100, 1050 17th St. NW, Washington, D.C. 20036. Readers may also send questions to him at that address.