Developer Transition in a Community Association.
With the recent increase in real estate development in Orange County and the corresponding creation of many new community associations, the issue of developer transition should be reconsidered. Developer transition is the process whereby control of the community association is transferred from the developer to the individual unit owners. This article will examine three issues in connection with developer transition. First, when does developer transition occur? Second, what documents should the individual unit owners request the developer to provide at the time of developer transition? Third, what actions should the individual unit owners take at the time of developer transition?
When Does Developer Transition Occur?
Developer transition should be a gradual process that may take months and sometimes years. Therefore, it is difficult to define exactly when developer transition occurs. A common definition of developer transition is based on Business and Professions Code Section 11018.7 which defines developer control for the purpose of amending the governing documents as the period of time during which the developer holds at least 25 percent of the voting interests in the project. However, this 25 percent standard is not dispositive. For example, a developer may own more than 25 percent of the separate interest in the project, but may give actual control to the individual unit owners for a variety of purposes and reasons. These include the avoidance of liability for ongoing operations or the commencement of the statute of limitations for construction defect actions. Conversely, the developer may own less than 25 percent of the separate interest and still exercise control over aspects of the project, such as architectural control, because of apathy of the individual unit owners or marketing or financial needs of the project. The difficulty of defining the time of developer transition is similar to defining pornography. As a U.S. Supreme Court Justice once said about pornography, "I know it when I see it." "The same may be said of developer transition. We know it when we see it. Although we can tell when the developer is no longer in control of the project, the date when this occurs is sometimes difficult to establish.
What Documents Should the Board of Directors Request the Developer to Provide at the Time of Developer Transition?
The Board of Directors should request that the developer provide ALL of its records relating to the project. This request should include minutes of corporate meetings, membership lists, accounting records, state agency filings, (i.e., DRE), architectural review standards, disciplinary matters, records of pending or threatened litigation, the current budget, as-built construction plans, deeds to the property reflecting the common areas, insurance policies, surety bonds and DRE approved subsidy agreements. Section 2792.23(a) of Title 10 of the California Code of Regulations provides a list of fifteen separate documents that the developer is required to deliver to the association. Further, in the article is a detailed checklist of records that should be delivered by the developer to the association.
What Should the Board of Directors do at the Time of Developer Transition?
- Review the Books and Records Provided by the Developer. It is not enough for the Board of Directors to request all the records from the developer. In addition, the Board must review the records and take appropriate action based on the records. The Board should retain competent personnel to review the records, such as accountants, property managers and attorneys. One item the Board must determine is the financial condition of the community association. This will require a careful review of income, expenses and reserves. The bank accounts should be examined to determine whether they correspond with the financial records.
- Review Pending or Threatened Litigation. This requires an assessment by association counsel as to pending or threatened litigation against the association, as well as pending or potential claims that the association may have against others. A determination should be made as to which litigation should be settled and which should be prosecuted or defended.
- Review Compliance with Corporate Laws. The corporate records should be examined in order to determine whether the association has been acting in conformity with corporate laws. This includes corporate meetings, government agency filings, minutes and notices to property owners and others. Good legal counsel can assist the association in complying with such laws and curing past oversights.
- Determine Adequacy of Common Area Amenities. The common area amenities should be examined to determine if they are in compliance with the governing documents and the developer's marketing statements. For example, the clubhouse should be inspected to determine if it is the size (square footage) described in the recorded architectural plans and whether it contains the amenities described in the plans (i.e., kitchen facilities). The inspection should include ALL common area amenities.
- Inspect the Common Area for Construction Defects. One of the most litigious and common aspects of community association life is that of construction defect disputes. One of the common issues in construction defect disputes is the statute of limitations. The developer may assert that the statute of limitations has expired while the Board of Directors may assert that the statute of limitations has not yet expired. Also, the developer may be more inclined to make repairs shortly after developer transition rather than several years later. The Board should promptly inspect the ENTIRE project thoroughly to determine if there are any construction defects. This inspection should be done by a qualified person such as an experienced general contractor or architect familiar with community association construction. Ideally, such inspection should be conducted by both the developer and the association.
- Designate a Suitable Location for Association Records and Association Business. The Board should promptly designate a location for association records and association business. The location should be a place where the association records can be maintained with both security and access. The records should not be kept in a place where they will be misplaced or stolen. At the same time, At the same time, the records should be reasonably available to members of the association who wish to examine the records. The meeting place for Board meetings should be easily accessible and have enough room for members to attend.
- Retain a Professional Team Early. The professional team should include at least the property manager and the attorney. Each person should be retained early in the developer transition process.
As to the selection of the property manager, the issues to be determined include whether the Board wants an in-house property manager such as a permanent employee or an outside property manager such as a company that represents other community associations. Sometimes, for economic reasons, a Board chooses to select one of its individual unit owners to serve as the property manager. This is usually a mistake because usually the individual unit owner does not have the expertise to serve as the property manager. Further, the individual unit owner will sometimes have a conflict of interest as to various issues that arise. In selecting a property manager, the Board should consider references from other associations (who employ or have employed the property manager), the level of commitment of the property manager (functions, hours, staffing, etc.) and the expense.
In the selection of association counsel, the Board should consider many of the same factors as described in connection with the property manager. The Board should retain an association counsel with experience in the area of community associations in general and developer transition in particular. The Board should not select the same person or firm retained by the developer. Aside from the obvious conflicts of interest, there is an advantage to retaining a professional staff that will take "a fresh look" at the problems and opportunities of the community association, including the past history.
This article is not intended as a definitive treatment of all the problems that may arise in the process of developer transition. It is an attempt to highlight some of the major issues that are likely to be placed in your path. For more information and a checklist contact my office.
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