Publications
New Board, Old Problems
Published May 21, 2005 as
Time of transition between developer, board
One of the most common misunderstandings among new unit owners is that at some point after they buy, the developer will walk away and leave nothing but chaos, mass hysteria, degradation and destruction. The following is the actual process of transitioning the Association from developer to owner control.
1. Developer Controlled Board. Sections 18.2 and 18.5 of the Illinois Condominium Property Act, as well as most declarations, outline the rights and privileges of a board of directors controlled by the developer. When the developer initially records the declaration and by-laws for the new development, the association comes into existence. Once the first units are occupied, the association must now function in administering and maintaining the common areas. Until then, they were the developer’s responsibility.
In theory, the developer is supposed to select a board to serve from the very beginning. However, most developers operate without the formality of a board and make decisions themselves. This presents a potential for frequent conflicts of interest and raises the specter of the developer having a fiduciary duty to all members
Since the developer is interested in having as little strife as possible with the new owners, the developer must turn over control of the board to the owners no later than after 75% of the units have sold or within three years of recording the declaration (Sections 18.2 and 18.5 of the Illinois Condominium Property Act).
Some developers may create a de facto board and appoint a representative who is obviously looking out for the developer’s interests rather than the homeowners. Since a board of directors is deemed to be acting in a fiduciary capacity relative to the owners, this compounds the potential for conflicts of interest. As a result, very few developers operate the board in a formal sense, have open meetings, elections, etc. They usually tell the manager to just handle everything.
The easiest way for a developer to have a smooth transition is after a substantial number of units have been sold, appoint several interested homeowners to sit on the board with the developer’s representatives to begin the process of transfer of control. However, all too often, the transfer of responsibility does not take place until the first annual meeting of members and the developer walks away leaving the owners a box of records and headaches.
2. Ad-Hoc Committees. While the developer is operating the association, some owners may get frustrated with the way things get done. A small group of owners may decide to organize on their own and begin to meet to act as a transition team. These owners may also choose to consult with a lawyer and the management company they wish to hire in the future. These committees need to seek out good potential candidates who can help, by recruiting intelligent, business-oriented people, to form committees and develop a strategy for turnover. These are called transition or ad-hoc committees and an association can then get started the correct way.
The committee can begin by planning, meeting with the developer, becoming familiar with existing contracts, provide input for budgeting and generally become educated in association operations. This way, by the time the first election is held, you have a pool of trained and informed people from which to choose. Ideally, this group will have enough experience and name recognition, so at the first meeting of members, they are assured of election to the board.
The type of people elected to the first board will often have a significant effect on how the association functions in the future, so the experience on the transition team is invaluable.
At the first annual meeting, the board is elected and the transfer of power symbolically takes place. The books, records and monies are transferred over from the developer, though not necessarily at the meeting itself, and the officers are elected by the board members (not the owners) at a subsequent board meeting (sometimes held the same evening after the owners meeting). If the developer has worked with a transition group, the turnover can be very smooth. If the developer has hired a professional property management company, they are already in possession of the records, so there does not have to be a formal transfer.
Once the board is elected, it may need to have several organizational meetings to establish procedures and rules as well as elect officers.
3. The First Year. The first year of operation is critical. The following are steps that must be taken immediately to assure a successful start. The first objective is to put a team together.
A. The board selects or reaffirms management to administer the day-to-day operations. Whether it is the board itself, an individual or a professional company, financial management must commence immediately.
B. Select an accountant – an independent financial consultant must be sought to facilitate an independent review of the records to guarantee establishing proper procedures and to avoid the appearance of impropriety.
C. Selection of legal counsel. A qualified and experienced association attorney must be selected. Because board members always have a fiduciary duty to the members, they have potential exposure for personal liability and should seek an attorney experienced in dealing with community associations to get the right answers.
4. Establishment of committees. Standing committees that act as advisory commissions to the board will make the board’s job much easier. Buildings and grounds, finance, recreation, and rules and regulations are some areas well suited to committee formation. The committees are also the logical training ground for future board members.
5. Additional tasks. In addition, the new board should be looking to implement the following:
A. Set goals and objectives for the first year.
B. Adopt rules and regulations.
C. Inspect the property, compile list of defects in common properties, review working drawings and punch lists for unremedied builder defects and warranty claims.
D. Review all existing contracts to assure that they are up to date and performed satisfactorily.
E. Engage an architectural/engineering firm to inspect the buildings and common areas and assist in preparing a reserve study.
F. Review all insurance coverage with the insurance company’s representative.
G. Establish strict policies on the frequency and conduct of board meetings.
Once all of the foregoing areas are addressed and procedures are in place for a smooth and efficiently operating association, the board will be able to fulfill its primary objectives, i.e., to preserve, protect and enhance property values, maintain the quality of life for its members and act on their behalf to promote the safety and welfare of the property.