Transitioning from a developer

Life is full of transitions, but the transition from developer to owner control of a community association undoubtedly ranks among the most challenging and (for novice board members) potentially overwhelming on that list.  More often than not, the developer delivers a huge box, or several huge boxes, crammed with official looking documents, miscellaneous papers and sometimes scraps of paper, invoices, reports and spare change (if you’re lucky) - arranged in no discernible order and identified poorly, if at all.  The board will have to figure out what’s in that box, what isn’t there that should be, and what it all means for the fledgling community.  That is no easy task, to say the least.

This annotated checklist won’t address all the issues board are likely to confront as they begin the transition process, but it will identify the essential information they need (and should demand from the developer), and provide a starting point for making sense of whatever comes tumbling out of the developer’s box.

The checklist is divided into three sections - governing documents, financial and management records and property information - highlighting in each section the documents and records boards should find, the questions they should ask, and the red flags they should recognize. 

GOVERNING DOCUMENTS

Questions to ask: 

Do the documents contain any unreasonable or undesirable restrictions?  Watch particularly for “poison pill” provisions restricting the association’s ability to sue the developer.  If these provisions are included, are they enforceable?  Can they be amended or removed? 

Do the covenants or rules and regulations contain any provisions that violate the condominium statute or other local, state or federal laws?   One red flag:   Language providing that the developer does not have to pay condominium fees on unsold units, which would violate the Massachusetts Condominium Act.   

Do the documents give the developer continuing interests in, control over and/or the right to earn fee income from recreational amenities, parking garages, laundry rooms, or any other association facilities?  If so, does the developer have a responsibility to pay his or her fair share for the maintenance costs, or have those costs been imposed entirely on the association?

Do the documents give the developer the right to sit on the board until the last unit is sold?

Do the documents accurately reflect the interests and concerns of community residents?    For example, do they:

Do owners approve of these restrictions, if they exist?  Posing that question to owners directly will give them an early glimpse of what it means to live in a self-governing community.

FINANCIAL AND MANAGEMENT RECORDS

Not surprisingly, this is the longest list.  It includes:

What to watch for

There is no short answer to this.  In the financial area, the board’s goal is to “follow the money,” to make sure that all association funds are accounted for and to verify that the developer has managed the funds appropriately, accounted for them properly and built a solid financial foundation for the community.  A post-transition audit by a CPA is essential and it should be conducted as soon as possible after the board assumes control.  Among the specific questions the audit should ask and answer: 

Tim Arel suggests that these  questions are crucial because they target the association’s financial strength – or lack thereof.  The audit in conjunction with a reserve/replacement study assessing the useful life of the buildings and their key components (which the board should also commission immediately after assuming control) will provide the information the board needs to develop a realistic budget and create a financial blueprint that will guide the community going forward. 

Management issues

The document checklist includes minutes of board meetings held under the developer’s control.  This is another essential review, often overlooked, which the association’s attorney should conduct.  Its purpose is to make sure the decisions the developer made and policies the developer established are consistent with applicable laws and regulations and reflect the policies and priorities of the new owner-selected board. 

The board should also ask a number of specific management-related questions, primary among them:

PROPERTY INFORMATION

Boards assuming control of their associations in the current economic climate may face particularly difficult challenges, including the possibility that the development is incomplete.  Promised amenities (swimming pools, a clubhouse, landscaping) may not have been added, infrastructure improvements may not be in place, construction quality may be inferior and  the schedule for completing future phases of the development may be uncertain or in some cases may have lapsed. 

In the case of phased developments that are incomplete or in which construction is still under way, immediately after assuming control, the board should have a condominium lawyer review the association’s documents to identify any legal issues related to the phasing. Associations can potentially benefit from lapsed development rights or improperly created or executed development or phasing documents.  These issues, which can be worth several hundred thousand dollars to an association, are often discovered in conjunction with construction defects or other problems. 

Because the issues arising from improper phasing are highly technical and complex, it is important to have competent transition counsel review the documents as early in the transition process as possible, preferably before other problems have been identified.

A separate transition study by a professional engineering firm is equally important. The purpose of this study is to evaluate the condition of all buildings, building systems and common areas, identify construction and design flaws or any other problems the board should address, and estimate the costs for correcting those problems.  (The engineering firm conducting the transition study can undertake the reserve study at the same time.)

The transition study will create the factual foundation on which the board will base any negotiations with the developer to resolve construction-related complaints.  If those negotiations fail, the study may serve as the springboard to litigation and possibly provide evidence supporting the association’s case.  

Strict deadlines apply to construction defect suits, which must be filed within three years after the problem is discovered or reasonably should have been discovered, and within six years after construction (per phase or improvement) has been substantially completed, resulting in a rolling six year time frame – another reason for the board to put commissioning the transitions study at the top of its ‘to do’ list. 

In considering whether to sue the developer, the board should consider, among other issues, the litigation costs as weighed against the cost of the repairs, the likelihood of prevailing in court, and the prospects of collecting any damages awarded ¾ a function of whether the developer has any assets and how effectively he has put them beyond the reach of creditors. 

While construction defect concerns will loom large, if they exist, they are not the only property-related issues the board must address.  On a long list of questions boards should ask, these stand out:

No one likes conflict and many transitions proceed smoothly.  But some do not and well-prepared boards need to anticipate that possibility.  Hopefully, this checklist will help boards identify potential problems and successfully negotiate unforeseen bumps in the transition road if they arise.

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