Behavioral scientists differ on whether it is the first three minutes, the first three months, or the first three years that are most important in the development of a child. But they agree that what happens or doesn’t happen during the formative years, however defined, plays a huge role in determining a child’s future well-being and success.

A common interest ownership community also goes through a formative period comparable to a child’s early years. And for a newly minted homeowner association, it is the transition from developer to condo owner control that plays the pivotal role, shaping the home owner community’s future development and largely determining its chances for success. What happens before, during and after the transition will determine whether a fledgling condo association gets off on the right foot on the path to self-governance or stumbles out of the starting gate and then struggles, perhaps for years, to find its footing and regain its balance. The transition, in short, can make a new community association or break it. The time for owners to begin thinking about the transition and preparing for it is long before it occurs.

The foundation for a smooth transition actually should begin, although it doesn’t always, with the developer. The developer initially owns all the units and so appoints and controls the homeowner association’s first governing board. State law and the community’s governing documents will define the point at which the developer must turn over control to a board elected entirely by the owners. These requirements differ, but, developers typically must begin appointing owners to the condo board when a specified percentage of the units have been sold, adding more owners progressively as more condo units are sold, and completing the transition to an owner-elected association board within a specified period after the condo association is created or after a designated percentage of the units have been sold.

Laying the Groundwork: The Condo Developer Transition Committee

Enlightened developers recognize that they have an interest in ensuring a successful transition and will do all they can to facilitate the process. A good first step is for the condo developer to appoint a transition committee to work with the developer and the developer-controlled association board throughout the pre-transition period. This committee can serve as a liaison between the developer and owners, offering suggestions and relaying concerns to the developer and conveying essential information about condo management issues and construction plans from the developer to the owners.

Establishing and maintaining open and constructive communications between condo owners and the developer during the pre-transition period can do much to ensure a smooth transition when that time comes. The transition committee can also provide an effective training ground for condo owners, many of whom are embarking on their first common interest ownership experience. Working with the condo developer, observing board meetings and learning about the decision-making process may provide the only advance training these owners and future condo board members receive before they assume responsibility for governing their community association.

Some developers, as noted, will create transition committees well in advance and even provide some condo association funds to support them. But if the developer doesn’t establish a transition committee, owners can and should take that step on their own. Owners don’t need the developer’s permission or approval to create an advisory committee and begin preparing for the transition to come. This is a good time for owners to begin learning what it means to be responsible for the community in which they live.

Keeping Watch Over The Condo Developer Transition

As part of their transition preparations, the advisory committee should track the decisions of the developer and the developer-controlled board. They should attend condo board meetings, if possible, review the minutes of board meetings, monitor the pace and progress of ongoing construction, pay attention to condo association finances, and begin identifying potential management and construction-related concerns.

Even if the committee lacks the formal blessing of the condo developer, as owners, committee members are entitled to review the condo association’s records, including its condo association financial records. They have a right to look over the developer’s shoulder and to question management decisions they don’t like or don’t understand. The developer still controls the condo association at this point, but owners have a vested and long term interest in the community’s future.

The committee should be able to gauge early on how much or how little cooperation owners can expect from the developer. If the relationship is positive, with good communication and give-and-take on both sides, the committee should arrange to meet periodically with the condo developer and begin creating a mutually agreeable “punch list” of construction issues and management problems for the developer to address before the transition.

One of the major concerns for a new homeowners association is the possibility that home owners will discover serious construction defects that need to be resolved. If the condo developer is less than cooperative during the pre-transition period – if he resists requests to correct even minor problems -- it is probably reasonable to assume that he will not become more cooperative after relinquishing control. Advisory committees confronting this situation may want to consider hiring an attorney to represent them before the transition. This is especially true if there are reasons to suspect that the condo developer is mismanaging condo association funds, or if it appears likely that owners will want to pursue a construction defect claim. The condo developer at this point still controls the condo association’s finances and is unlikely to allocate funds for an attorney who may eventually represent the owners in a suit against him. So owners would have to pay any pre-transition legal costs out-of-pocket, but depending on the situation, that may be money well spent.

Collecting Essential Condo Documents

Whether the transition committee is an “official” body created and supported by the condo developer or an ad hoc group the owners establish on their own, one of its most important tasks will be to identify and (if possible) begin collecting the condo documents and information the owner-elected board will need when it assumes responsibility for governing the association. In essence, the board will want virtually every scrap of paper related to the association’s construction management, governance, and condo finances.

After the Transition to the Condo Association

The condo developer’s last official action before relinquishing control to the condo owners will be to call a meeting at which owners must elect the condo association members of the board that will represent them. In addition to electing new officers and getting organized, among the new board’s first official acts should be to hire the professionals they will need to advise them in the days immediately following the transition. Specifically, they will want to retain an attorney, a management company, an engineer, and an accountant.

The Attorney

If the condo transition or advisory committee retained an attorney before the transition and is satisfied with the attorney’s work, the board may want to continue that relationship. The difference now is that the attorney’s fee can be paid from condo association funds rather than from the condo owners’ pockets. If the transition committee has not actually hired an attorney, it should have done enough preliminary research to enable the condo board to make the selection quickly.

The attorney should review the condo association declaration and governing condo documents to make sure they comply with applicable laws, and should review pre-transition decisions made and condo rules and regulations established by the condo developer and the developer’s board to ensure that they, too, are consistent with the governing condo documents and applicable real estate laws and regulations. The attorney is looking for anything the condo developer may have overlooked, done incorrectly, or failed to do that could create problems or potential liability for the condo association. The attorney should also review the condo by-laws and condo rules and regulations to make sure they cover effectively all the major issues the condo association will want to address. Ideally, the transition committee will have undertaken an initial review of the governing condo documents. Condo board members who have not already done so should immediately familiarize themselves with these condo documents. One of the most important first steps for the new condo board should be assessing whether the boilerplate condo rules and regulations the developer put in place represent a good match for the community association. The board should solicit feedback on this question from condo owners (a good chance to them involve din the decision-making process early on), and then work with the attorney to revise or eliminate any undesirable condo rules and adopt new ones.

The Condo Association Manager

If the condo association decides to hire a professional condo association manager or a condo management company – a good idea for all but the smallest community associations – the condo board should make that selection as soon as possible after the transition. The expertise an experienced manager provides can be invaluable in the early days when the new board is learning the condo association governance ropes and taking over the operations of the association. Condo associations will often choose to retain the condo management company hired by the developer. The company’ s knowledge of the community association may be an advantage, helping with both continuity and the education of condo board members. However, if the condo developer’s management company hired stays on, it is important that the board renegotiate the condo management contract to clearly define the condo manager’s role, to ensure that the condo manager understands the association’s expectations, and to ensure that the condo association receives the services it needs. It is also important for the condo board and the manager to discuss the manager’s relationship with the developer; the board should ask specifically what the manger’s position would be if the condo association were to become involved in litigation with the condo developer.

The Engineer and the Building Assessment

Immediately after the transition, the board will want to hire a professional engineer to conduct a thorough transition study, to evaluate the condition of all buildings, building systems, and condo association common areas, and to identify any problems or potential problems the condo developer should address. This study should include a detailed description of any structural problems (including construction and design flaws), an estimate of the costs for repairing or replacing defective components, and a suggested schedule for undertaking and completing that work. (In conjunction with the transition study, the engineer should also prepare the reserve replacement study the board will need for budgeting and future planning purposes.)

The transition report will create the factual foundation the condo board may need to negotiate with the developer and, if the negotiations are not successful, to initiate legal action if necessary to force the condo developer to correct or pay to correct any problems for which the developer is responsible.

There is no reason to assume that the condo board will have to sue the condo developer to remedy construction problems or for any other reason. The transition study may determine that everything is fine or the condo developer may willingly correct any problems the study does identify. But if there are structural problems, you want to identify them early in the process, partly because the passage of time will almost certainly make the condo developer less responsive, but also because construction defect suits are subject to strict time limits. Delays in discovering problems could prevent the association from pursuing legal action or reduce the prospects of recovering damages from the developer even if the condo association sues successfully and wins an award.

The Accountant and Condo Finances

While the attorney reviews the legal issues and the engineer focuses on structural concerns, the condo board will want a certified public accountant (CPA) to assess the association’s financial condition by conducting a post-transition audit. The audit’s purpose generally is to verify that the developer managed the condo association’s funds appropriately, accounted for them properly, and created a solid financial foundation for the new community association. On the income and expense side, the accountant will want to determine whether the developer has collected all revenues owed to the condo association, paid his/her share of the association common expenses on units the developer owned before they were sold, paid outstanding bills and properly allocated expenses. The condo association wants to be sure the developer did not classify as condo association expenses and pay with condo association funds costs for which the developer should have should have been responsible.

On the budget side, the audit should evaluate the condo developer’s expense and income projections to determine if both are reasonable. The accountant should tell the condo board in particular if the common area condo fees are realistic. Developers sometimes set the condo fees at an artificially low level while marketing a new community association to increase the appeal to prospective buyers. If an audit determines that to be the case in your community association, the condo board will want to identify the problem and make any necessary adjustments, increasing the condo fees if necessary. The longer the board leaves artificially low condo fees in place, the more financial problems the community association will face, and the more painful the inevitable correction process will be for condo owners. The transition audit report combined with the condo reserve replacement study the engineering firm produces will give the board the information it needs to develop a realistic budget and to determine how much the condo association should contribute annually to its condo reserve fund. In terms of the long-term financial health of the community association, few decisions the board makes will be more important than these.

Stephen Marcus
Marcus, Errico, Emmer & Brooks, P.C.