09/16/2016: Just Named A Director On Your New Condo Board? Better Get Busy
By Benny L. Kass
September 16 at 7:30 AM
I have just been elected president of our new condominium. Our new board of directors has just taken over from the developer, but frankly we are at a loss as to where and how to go. Any suggestions? — Harry
Harry, my condolences. Being a board member is not fun; the hours are long, the pay is zero and no one ever thanks you for your hard work. They do, however, complain a lot.
What many condo owners — especially first time home buyers — do not understand is that many associations are big businesses, with budgets in the millions of dollars. Unless owners get involved, learn the process and hire competent professionals, the association may be headed for disaster — financially as well as emotionally.
A condominium board comes into existence when the condo documents are recorded among the land records in the county or city where the property is located. The developer selects the first board of directors, which manages the association until turnover of control is accomplished. In general, the laws in the surrounding jurisdictions require that control be turned over to the owners within so many years after the first sale, or when a certain percent of the homes have been sold, whichever comes first. The turnover requirement is spelled out in your association’s governing documents.
Transition between developer and owner control is perhaps the most important aspect of any community association. If done properly, the association will be off to a good start; if done poorly, it may take a long time to get back on track. And some associations never succeed.
Once the owners are in control, there are four mandatory steps that must be taken by the new board:
Select a management company: The new board must decide whether to retain the existing management company — which had been selected by and may be too loyal to the developer — or select a totally independent management company. The association may decide to forgo hiring such a company and become “selfmanaged,” but I personally do not recommend this, even for a small association. If the board gets involved in everything from collecting condo fees to arranging to shovel snow and cut the grass, burnout will take place quickly. The board’s role is to make sure that management is doing its job and reporting monthly to the board.
Audit the books : An independent auditor or a certified public accountant must examine the association’s books. It is important for members of the new board to satisfy themselves (and the owners they represent) that during the time the developer was in control, all money collected and all expenses paid were properly accounted for. Keep in mind that while the developer is in control of the association, the developer also has access to the association funds. You want to make sure that funds that should have been paid by the developer are not inadvertently (or purposely) paid out of association proceeds.
Sometimes, the developer controlled board may have allowed owners to become seriously delinquent in paying their association fees. The new board must establish a comprehensive collection policy that will be applied uniformly. I am a strong believer in not letting owners get more than one month behind. It’s easier to collect when the owner does not owe a lot of money.
My advice to condo boards: Your policy should be zero tolerance but with a heart. Clearly, if owners have legitimate financial problems, you should try to work with them and develop a comfortable payment schedule. But you have a fiduciary duty to those who elected you, and making sure you are not going into debt is part of your obligations.
Retain legal counsel : The association should retain a lawyer knowledgeable about community association laws. The lawyer will have to handle a wide variety of issues, ranging from developer problems — such as warranty and other transition issues — to assisting the association in its day today activities. A community association is not only a mini democracy — it is also a business and must function in that capacity as well. Issues ranging from zoning to criminal, labor to health are some of the problems that associations encounter. Physical
Physical inspection of the property : The board should hire a licensed engineer to inspect the common areas of the complex. The engineer should determine whether there are any warranty defects that should be called to the attention of the developer. The engineer can also help the board determine the proper level of reserves that are needed for future repairs. This is known as a “reserve analysis study.”
The professional engineer determines the useful life of the major components in the complex — the roof, elevators and other common areas — and the projected cost to replace them at the end of their life. On an annual basis, sufficient funds should be placed in reserve so that when the component wears out, there will be enough money in reserve to pay for its replacement.
Otherwise, each owner may face a large special assessment. Financial organizations, such as Fannie Mae, Freddie Mac and the Federal Housing Administration, all look at an association’s budget when determining whether to approve a loan for a purchase or even a refinance. And having adequate reserves is very important to those lenders.
Turnover of developer control is the most important aspect in determining the future success of a community association. Good dialogue among unit owners, the developer and the board goes a long way toward creating a successful association. It’s hard work to be on a board of directors, but your home is your investment, and you certainly want to protect it as best you can.
Benny L. Kass is a Washington and Maryland lawyer. This column is not legal advice and should not be acted upon without obtaining legal counsel. Send questions to [email protected]