Transitioning from Developer to Owner Control in Community Associations   Leave a comment

There are many subdivisions (and condominiums) in metro Atlanta facing the problem of their development going unfinished with homes unbuilt, partially built, or owned by lenders and sitting empty.  Especially in a development with common amenities (everything from pools to elevators) this can have a serious impact on the people who live there.

The status of the association in these developments can be frustrating to figure out, and in the middle of it all, essential bills, such as those for street lights, can go unpaid.  Owners can even make the situation worse by refusing to pay their assessments – as they fear the developer or builder in control of the association may misuse or misappropriate the funds.  Sometimes those assessments are the only source of revenue to cover essential expenses and no money from the developer is required to be paid (or available).  Beyond that, the declaration that created the right to assess is unlikely to allow owners to withhold assessments for such a reason, putting the owners in the position of purposely underfunding the association and putting themselves in violation of the documents which could cause their voting rights in the association to be suspended.

So how should owners, builders, developers, and lenders deal with this situation?

The analysis is generally very fact specific, but often the best thing to do is (a) hand over control of the association and (b) reserve certain assessment and architectural control rights for any undeveloped lots to the builders/lenders.

Owners often outright reject this advice. They want to create a brand new, “fresh and clean” association to run the development because they do not want to inherit any problems the developer created.  They also do not want to give up control over unbuilt lots for fear that something undesirable will be built. Unfortunately, given the way the right to levy assessments, engage in architectural control and enforce restrictions is created, this is an expensive and difficult project to accomplish.  The rights of the original association would need to be legally “tied” to the new association, and consents from the owners of lots (including the developer, builder, and lender if they own any lots) would probably be necessary.  Without a doubt an experienced community association attorney should be consulted before this route is chosen.

Even if these actions can be properly accomplished and a new association is created to step into the shoes of the old one, the goal of a “fresh” entity that is free of any existing liabilities of the original association is unlikely to be achieved.  The new association may be seen as a successor to the original association. In that case the new association could still be given the obligations of the old association, even after all the expense and effort of incorporating a new entity.

Lenders and developers often do not want to give up control of the association, either, out of concerns that the owners will apply architectural controls and assessment rights in a way that will harm their ability to market and sell the remaining unfinished lots.  This concern is generally well-justified, as purchasers of unfinished lots usually have a horror story to tell about a “problem association” that refused to allow them to build out a lot, causing time delays and imposing extensive standards that might even exceed those already existing in the development.  The perception (right or wrong) that a good deal of time and effort will have to go into getting approvals from a homeowner-controlled association can negatively impact the marketability of the unfinished lots.

In this situation the homeowners and the developer (or lender in possession) need to reach a reasonable compromise to give the homeowners control over the association’s day to day operations while giving the developer or lender the rights they need to preserve the marketability of the unfinished lots.  Everyone in the development benefits if the homes and common areas are properly cared for, by people present and invested in their care.  Equally as important is the maximization of the value of the lots that are unfinished as that value has an impact on the values of the finished homes in the development.

In some cases, this solution is not the best solution, though.  In some cases a lender that has taken possession of unfinished lots may be the best choice to run the association for a time, as a successor to the developer.  A builder that is still engaged and has significant interest and value in the development may also be a good choice, depending upon the situation.

As mentioned before, the analysis is very fact-specific and must be driven by figuring out what each party is capable of, what each party needs, and what will reasonably work in today’s market.  Of course, I highly recommend that you get experienced assistance with this type of situation, both from community association attorneys and from community managers.  At the end of the day, what works best is to come up with a reasonable plan that deals with the current realities in the development.

Sometimes those plans are far from perfect, but without some action to fix what’s broken things will inevitably get worse, with less chance of fixing it.

–By Amy H. Bray, a partner in the Commercial Real Estate Department, Andersen, Tate & Carr, P.C.

Do you want to use this blog article?  You may, as long as you include this complete bio with it:

 Amy H. Bray is a Georgia attorney, focusing her practice in community association and real estate law matters. 

 Her firm, Andersen, Tate & Carr, P.C., works with all manner of clients in business and personal matters, providing “big firm” sophistication with suburban law firm attention and service.

Website: www.atclawfirm.com

Blog: www.andersentatecarr.wordpress.com

 Copyright © 2009 & 2010, Amy H. Bray & Andersen, Tate & Carr, P.C.

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