By Beth Mulcahy, Esq.
I drive all over the Valley to attend community association board meetings. Since 2008, development in the Valley came to an abrupt halt. However, over the summer, I noticed that residential development is back in full force in Arizona. It is common now to see residential construction and new associations are popping up again all over the Valley. This is great news. It is nice to see the Arizona residential economy back on track. Now that development is booming again, I thought it would be a good idea to list a few reminders about transition from developer to homeowner control and common transition issues.
Transition from developer control occurs when control of the association shifts from the developer to the owners. The transfer of control can occur in several ways. However, the most common method is a weighted voting approach whereby the membership voting ratio is arranged so that the developer will transfer control to the association after a specific percentage of the homes have been sold (typically 75%). In some instances, there are outstanding issues between the developer and the owners at the time of transition. Set forth below are the most common transition issues:
1. Construction Defects: We suggest that associations in the transition process consult with an engineer to create a punch list of defects, determine the nature and extent of the defects and consider the possible remedies. (Examples of construction defects may include: leaky roofs, windows and balconies; stucco cracks; grading and drainage problems; settlement and cracking of foundations; and damaged sidewalks.)
2. Failure to Adequately Fund a Reserve Account: The association’s developer has a fiduciary duty to adequately fund the association’s reserve account. The association should consider obtaining a reserve study or advice from a qualified reserve analyst regarding how much money should be/have been in the reserve account and/or general checking account at the time of transition.
3. Failure to Deed Common Areas to the Association: This problem can be corrected by the developer quit claim deeding the association’s common area to the association.
4. Misappropriation of Association Funds: The association should consider hiring an independent certified public accountant to conduct an audit of the association’s books and records to determine if the developer has paid “developer” expenses with association funds.
We strongly suggest that a transition committee or the board (post transition) obtain advice from an independent legal counsel who represents community associations (i.e. not the developer’s attorney) regarding any unresolved transition issues prior to the transition or shortly after the transition. Mulcahy Law Firm, P.C. provides a free consultation to the association’s transition committee or the board of directors.