Transition From Developer to Unit Owner Control

Published on: November 22, 2006

The transition from developer to unit owner control of the board can be a stressful, uncertain and overwhelming time in the life of a community association. A new board may be confronted with questions regarding the condition of the common area, the financial health of the association and a myriad of operational issues. Many of the steps the board takes, or fails to take, in this critical period will have long-lasting impacts on the health and vibrancy of the association. It is important that the board confront transitional issues head on, armed with knowledge and an effective and comprehensive plan to address these issues.

A board (or even concerned unit owners prior to turn over) should implement a plan for transition as early as possible. One primary goal of that plan should be to establish a transition team. While every community association has unique characteristics and will confront different issues, there are several players generally needed to assemble a sound transition team including a professional property manager, an engineer or building consultant, an accountant, an insurance agent and association counsel.

The value of a professional property manager or property management company cannot be overstated during transition. There are numerous self-managed community associations in New England which are expertly operated by hardworking and dedicated trustees. Self-management, however, is not always an available or viable option. At the time of transition an experienced property manager will not only be able to provide sound advice regarding “start-up” operational issues but will be able to assist the board in identifying areas of concern and in assembling the rest of the transition team. A professional property manager will be able to tell the board what their problems are and who they need to address those problems long before the issue may be apparent to the board.

An accountant should be retained to perform a review of the books and records. It is worth noting that an “audit” involves a more thorough and costly analysis than is generally necessary during transition. The goal of the financial review is to give the board a handle on the association’s finances. In addition, the financial review will also allow the board to ensure that there were no financial irregularities prior to the transition of board control. This review might be expected to explore;

  • whether common area expense fees have been properly assessed to and collected from all units,
  • whether common area funds were appropriately spent prior to transition and
  • whether capital contributions were paid.

An engineer or other building consultant should be engaged to evaluate the condition of the common area buildings and improvements. This is particularly necessary where the board is aware of construction problems, but it is advisable even if no problems are apparent. This analysis gives the association the information it needs to approach the condominium declarant for redress. Delays in obtaining this information may inhibit the board’s ability to obtain a meaningful response from the declarant. In addition, this analysis provides the association with the information necessary to formulate realistic maintenance schedules and/or reserve estimates. Obtaining this information as part of the transition process will prove invaluable in the long run.

Another member of the transition team should be an insurance agent with expertise in community associations. This expert will be able to analyze the association’s policies and confirm that the appropriate types of coverage are in place and that coverage and deductibles are in acceptable amounts. The time to find out that the association lacks Directors and Officers coverage or that the buildings are underinsured is not after the board has been sued or experienced a casualty loss. With very little effort on the part of the board, an expert insurance agent can review policies, identify deficiencies and, most importantly, recommend a fix.

The transition team should also include association counsel. The role of association counsel may be quite limited in certain circumstances or more prominent in associations that have identified some of the problems referenced above. Clearly, a board that has identified construction deficiencies, financial irregularities or other potentially serious legal issues will benefit from the advice of counsel at the earliest stages of transition. The benefit of engaging counsel early on in the transition process, is similar to the benefit derived from engaging the other members of the team. The sooner the board is aware of an issue the earlier and more cost effectively the issue can be addressed.

Transition from developer control can be difficult. However, with a sound approach, and reliance upon advice from experienced professionals, the risks associated with transition can be effectively managed. The development and implementation of a solid transition plan is an investment of time and resources which can benefit a new association for years to come.