Publications
The Period of Developer Control
Published March 27, 2004 as
New homeowners associations need time to get established
What happens during this murky period between the time that you move into your new home and when you finally vote to elect owners to take over control of the board? Who gets to make decisions about a wide range of topics that have a direct impact on your life? The developer, that is who!
There are urban myths galore that haunt new associations, the most common one being that the association does not exist until an owner-controlled board is elected. As I said, it is a myth.
The process of building and developing a new community can sometimes be viewed as a creative process that begins long before your neighbor is elected as the first board president. There is a distinction between condominium and other types of associations, but ultimately the end result is the same. The association often exists and is actively operating long before the first owner board is elected.
A condominium is created when a declaration of condominium ownership with plats of survey and floor plans are recorded in the county where the property is located. The recording of the declaration is often held up until the last minute by the developer because Section 9 of the Illinois Condominium Property Act (“Act”) requires the developer to pay assessments on units he owns so the finished units are submitted to the Act as late as possible. That would apply to all additional units added in with each amendment to the declaration as well.
However, the legal entity called the “association” comes into existence when the declaration is recorded. Every condominium and master association in Illinois and many homeowners’ associations must be turned over to the owners within three years of recording of the declaration or upon sale of 75% of the units, whichever is sooner. The statute merely addresses the issue of control, but the association exists long before this. As soon as one unit is closed, the “association” must begin to provide services, collect assessments, pay bills, etc. and someone has to make the decisions.
As a result, the developer controls, or in fact, is the board of directors. This imposes certain duties upon the developer, including that nefarious, scary one, known as “fiduciary.” When you are controlling and managing other peoples’ money, you are deemed to be a fiduciary; the highest level of trust defined by law.
Illinois law has gone so far as to say that a developer controlled association (I refrain from using the term “board,” since that implies meetings and a certain level of democracy) must not only prepare a budget, but it must also contemplate the need to make future capital repairs and actually calculate and collect reserves. The failure to do so is considered a breach of fiduciary duty and an owner-controlled association can recover damages long after the developer relinquishes control.
While the developer and the “board” are still synonymous, the developer also acts as the arbiter of architectural control decisions. New owners desirous of installing decks, patios, antennas, awnings, etc. usually go to the developer, get verbal permission without much else in the way of documentation and away they go.
Enter the owner-controlled board who wants to be a “fenceless” community and now try to solve the problem of the two fences installed two years before with alleged board/developer approval. No authority, no documentation and no resolution.
The developer-controlled association sets the level of assessments based upon (1) expenses and (2) marketability. Aren’t these two objectives mutually exclusive you ask . . . and perhaps even in conflict? Certainly.
However, given the competitiveness of the real estate market, if two communities are identically priced and one has much higher assessments reflecting real expenses, which one is more appealing to the first time, cash strapped purchaser?
The tone of this article is not to portray builders as evil; merely business people. It all comes down to profitability and as a secondary goal, customer satisfaction (as long as that does not cost too much). Therefore, there are certain conditions one should expect to see in a new development that can be answered without having to be the recipient of the typical finger pointing:
1. The association is born when a declaration is recorded and/or when the not for profit corporation is registered with the office of the Secretary of State.
2. Even though the association technically exists, it will not operate like you would expect it to, until the first owner-board is elected, which could be years away.
3. There will probably be no board meetings to attend. The developer or one of his employees makes “board-like” decisions and runs the property or gives direction to a property manager.
4. There may be owners’ meetings from time to time, but they are usually “beef” sessions. The worse they are, the less likely the developer will hold another one.
5. Sometimes, a conscientious developer will encourage owner involvement prior to turnover by sanctioned representation at informal meetings or the creation of a transition committee. This is actually a smart move because it deflects some of the anger from the developer and gives the owners an ombudsman to work out disputes. From the perspective of the owners who volunteer, this might be unpleasant because if a developer is merely providing lip service, the committee will bear the brunt of the owners’ anger.
6. All budgets crunched by the developer will be as low as possible, resulting in the first board of owners having to raise assessments.
7. The developer will turn over control to the owners later, than sooner.
8. A management company hired by a developer will be blamed for all of the property’s ills even though they were just carrying out the developer’s wishes
9. If there has been no pre-planning or transition legwork done, in many instances the early days of a new owner-controlled association can be chaotic.
What can be done to avoid total anarchy? By getting involved early, by asking intelligent, unemotional business-like questions and creating an ad-hoc or transition committee that will operate in a non-threatening environment.
Even if the new property is falling down around your ears, no one is answering service calls and there is not five cents in the bank, until the developer calls for election of the board, the individual owner is powerless. However, if there is a regular dialogue with the developer, occasional meetings and the education of a core group, the transition and early going will be smooth and productive.