June 2003
Transition from Developer Control
By Carolyn B. Goldschmidt, Esq.

Appeared in Arizona Community Association Journal

The homeowner’s association (HOA) that governs a condominium or planned community is generally a non-profit corporation that is created by the subdivision developer very early in the development process. Control of the corporation rests with the developer until “turnover” or “transition” to the control of the individual unit or lot owners (Owners). Typically, there is a triggering event for turnover in the Association’s governing documents or in the state statutes: a specific date or sale of a specified number of units or lots.

In my community association law practice, I have seen a wide range of turnover procedures. In one instance, the developer’s representative arrived at the first scheduled annual meeting of the HOA with a box full of documents and accounting records. He dropped the box on the floor of the meeting room and announced to the attending homeowners that the “Association is all yours,” and he left. The bewildered homeowners did not know where to begin in assuming governance of the corporation.

On the other end of the spectrum, a developer of a large master-planned community had a transition plan outlined in the Declaration of Covenants, Conditions and Restrictions. Although the developer retained control by giving itself a plurality of votes (3 votes for each lot owned) for the first 3 years of the community’s existence, an advisory board of homeowners served from the inception of sales until turnover. The developer consulted with the advisory board regularly on issues of community importance, and the advisory board also met on its own to discuss policy and procedures for community governance. At turnover, the governing documents provided for the advisory board to act as the first board of directors for the HOA. Other developers have provided for several committees staffed by homeowners to work with the developer-controlled board in addressing policy and governance issues for the HOA as well as in helping to administer the business of the HOA.

Whether there is a formal transition process or not, it is important that the Owners or a representative committee of Owners, meet prior to the transition date, to determine what concerns and problems affect the entire subdivision and which are individual warranty problems that should be handled by each Owner directly with the developer. At a subsequent meeting, the Owners can begin organizing themselves into committees to investigate areas of interest and concern. This process will help to pinpoint prospective HOA leaders and also helps the Owners to become familiar with the scope of HOA operations. Transition should not be a rude awakening but rather a well-organized changing of the guard.

There often is a reluctance on the part of both the developer and the Owners to institute and complete turnover. The developer may fear that the Owners will interfere with building and marketing efforts for remaining lots or units, thus threatening profitability. The Owners may fear that they will be assuming an unknown financial or legal burden or will be releasing the developer from areas of potential liability. Thus, a well-planned transition process is important to allay these potential fears and misunderstandings. HOA representatives need to have access to financial, property, and corporate records prior to turnover. There needs to be an orderly process for transfer of the Association’s funds and records. Ideally, the first Board of Directors will be in place before the turnover date so there are no gaps in governance. Oftentimes if the HOA had a professional manager during the period of developer control, that manager is kept in place during turnover to ease the transition.

A few words about what transition is not: It is not the act of transfer or acceptance of the common elements or common property. In most developments, the common property is transferred from the developer to the HOA or to the owners during a very early stage of the development process. At turnover, the Owners should assure that a deed is on file at the County Recorder’s Office evidencing transfer of common areas to the Association.
In addition, many homeowner-controlled groups are reluctant to accept control of the HOA from the developer because there is a belief that such acceptance amounts to a release of the developer from liability for improper acts. However, transition is not the “turnover” of the common areas to owners who then have no further recourse against the developer for defects in the common areas. Furthermore, transfer of control from the developer to the owners is not an a ct which affirms that developer construction warranties have been met. And, acceptance of control of the HOA by the owners is not an automatic release of the developer for acts that amount to breach of fiduciary duty or financial malfeasance.

The ideal transition process takes into account a thorough Owner education program with the gradual transfer of control and responsibility for HOA affairs to the owners. This will result in a smoothly-run HOA without the disorder and ill feelings that typically accompanies a sudden turnover to unprepared owners.

Carolyn B. Goldschmidt is an attorney with the Goldschmidt Law Firm in Tucson, Arizona. She is certified as a real estate specialist by the State Bar of Arizona, and her practice focuses on Community Association law.