Condo Media - May 2011 - 24

MANAGEMENT

by Nena Groskind

Smooth or Bumpy
The Transition from Developer to Owners Sets the Course for a New Condominium Community
new condominium development charts many milestones: The approval of the construction plans, the groundbreaking, the sale (or pre-sale) of the first units, among them. But the life of a new condominium community arguably begins at transition, when the developer transfers control to the owners. Some of these transitions are seamless. The developer leaves, the board elected by owners takes over, and they all live happily ever after. And then, there are the not-so-smooth transitions — the ones that bring surprises (most of them unwelcome) for owners, along with a raft of challenges and headaches they didn’t anticipate. Every condominium attorney has horror stories — about buildings located atop bogs, developers who fail to finish promised amenities, financial records that are disorganized or nonexistent. Charles Perkins, a partner in Perkins & Anctil, is representing a community that found its electricity about to be cut off because the developer hadn’t paid the bills and had left no money in any of the association’s operating accounts. Ellen Shapiro, a partner in Goodman, Shapiro & Lombardi, is representing a newly transitioned over-55 community at which the developer, struggling to find buyers in a difficult market, is ignoring the age restrictions, claiming not to care that this violates both the association’s governing documents and the special permit under which the project was developed. association finances, using association funds to cover development costs, cutting “sweetheart” deals with friends of family members to provide vendor services, cutting construction corners to reduce development costs or promising amenities he has no intention of providing. But in many cases, Perkins and Shapiro have found, problems arise not because the developers themselves are bad actors, but because they received bad advice (or no advice) or were overwhelmed by financial pressures that led them to make bad decisions. “Many developers decide they will do everything themselves; they don’t hire a condominium attorney; they don’t hire a management company; they don’t get any advice on how to structure a budget. They just pay the bills as they come in,” Perkins says. When you look closely at the finances in these situations, Shapiro adds, you often find that “the developer paid all the expenses he was supposed to pay. He may even have done more than was required.” But whether the developer has been misguided, careless, clueless or dishonest, the bottom-line is often the same — the financial records the new board inherits, and sometimes the association’s finances as well, are a mess. At best, it will take the board weeks or months to get organized; at worst, the community may start out in a financial hole from which it never fully recovers. The developer who creates the condominium initially owns all the units and so appoints and controls the homeowner association’s first governing board, but state law and the association’s governing documents require the developer to gradually relinquish control. The details vary, but developers typically must add owners to the board progressively as units are sold and complete the transition to an ownerelected board within a specified period after the association is created or after a specified percentage of units have been sold.

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The Transition Committee
Owners and developers both have an interest in ensuring a smooth transition, because it establishes a solid foundation for the new community and reduces the likelihood that owners will feel compelled to sue the developer in the future. Most attorneys advise developers to create a transition committee through which owners can work with the developer and the developer-controlled board throughout the pre-transition period. Serving on the transition committee will allow owners (many of whom will become members of the first ownercontrolled board) to learn about the community’s operations and governance, giving them some training and a measure of institutional knowledge when they take over. The transition committee also serves as a liaison through which the developer can share information with owners. It is also a place where owners, in turn, can convey concerns to the developer, identify potential problems and (ideally) work with the developer to solve them before the transition. If developers balk at establishing a transition committee, Perkins suggests that owners tell them: “It’s better to work with us now than to fight with us later.”

Careless or Clueless
Sometimes transition problems result because a less-than-ethical developer has been playing fast and loose with

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CONDO MEDIA • MAY 2011
Condo Media - May 2011

Table of Contents for the Digital Edition of Condo Media - May 2011
