Smooth Transitions: Moving from Developer to Owner Control

I hope everyone has had a wonderful summer. As pumpkins appear on store shelves and we approach the transition to Autumn, I’d like to discuss the transition of a planned community from developer control to an effective operation by the ownership.   If it feels like new condos and community associations are continuously popping up in your town—this is because they likely are. As of 2023, planned community developments represented approximately one-third of the nationwide housing stock; the Community Association Institute predicts that by 2040, community associations will be the most common form of housing nationwide. That means there are many communities that either currently need to or will soon need to transition from being controlled by the developer to being controlled by the homeowners through an association.   DEVELOPER CONTROL I like to think of planned community associations as a kind of small local government. They are entities, organized under the law and run by elected representatives, which operate to serve the common good of the community. However, associations do not simply sprout into being, fully operational, when a new development is completed. Along with the physical structures and layout of a new condominium or planned community property, the developer provides the foundations for the governance structures and management of the association. Generally, it is the developer who prepares and files the initial declaration and bylaws, which grants the developer the authority to oversee such matters as the first member(s) of the association’s board of directors. O.R.C. 5311.08(C)(1) requires that an Ohio condominium association must be established no later than the recording of the deed following the first closing on a condominium property. For Ohio planned communities other than a condominium, O.R.C. 5312.03(B) requires that the association be established even earlier, no later than the date of sale for the first home to a bona fide purchaser.   This is a period of developer control. The developer is granted the powers and duties of the association until the owners can take the reins. Across states, the developer control period ends once a certain percentage of homes have closed and are no longer titled to the developer. For condominiums in Ohio, R.C. 5311.08(C) provides that, within 60 days after 25% of the interests in the common elements are sold, the owners must elect a corresponding 1/3rd of the board of directors. During this time, the developer is still represented through the remaining board positions. For community associations, the transition from a developer control timeline is not governed by statute but by the governing documents. This process might continue until all lots are transferred to legitimate buyers. In condominium associations, except for expandable associations, the developer control period is limited to 5 years following the association's establishment.   THE TIME FOR TRANSITION Even when the transition timeline is provided by statute or the governing documents, the shift from developer control is not always smooth and can lead to litigation. It is worth noting that developers’ interests and the community’s interests are not necessarily in alignment. A developer’s priority is to get the community up and running and to sell as quickly and as profitably as possible. Long-term concerns are therefore not generally at the forefront of the developer’s consciousness. A developer-run board may devote more time and effort to beautification and to keeping assessments low to attract homebuyers, rather than invest in building up the association reserves. Developers may pursue cost-cutting measures in construction which will cost the community more in maintenance. Thus, the developer may try to retain control of aspects of the community and make decisions in conflict with the owners’ elected representatives on the board. Even the initial governing documents are often drafted with the developer’s priorities in mind.   The transition from developer to owner control should happen gradually and in accordance with the statute and the governing documents. While it may not always be feasible, there should be transparent communication between the developer and the community members, allowing for increased involvement in the association's operations and decisions. To train and transition future board members, the owners should form a transition committee and develop a plan for taking control. This committee would evaluate the community and identify maintenance needs, potential challenges, and matters of compliance. Matters for a new owner-run association to consider include the physical state of the community, ensuring compliance with the governing documents and applicable law, how to handle inter-community conflict, rules, and enforcement within the community, burdens of maintenance and repairs, the association’s financial assets and collections policy, the annual and board meeting schedule and elections process, and record-keeping.   Conflict tends to arise when mistakes are made throughout this transition. To avoid this, owners are advised to seek professional support for their new responsibility. Community managers provide operational support and expertise, as well as a network of contacts to assist in a variety of matters. Engineers may evaluate the condition of developer construction for readily apparent defects as well as hidden faults. And of course, an attorney can advise to ensure the transition proceeds apace, including on matters such as association duties and authority, legal requirements, and developer liability. As it happens, we have one of the few licensed Ohio HOA and condo law experts on our team. Whether yours is a newer association amid developer transition, or you live in a well-established community in need of ongoing support, the EQUES® team is here to assist.   Madeline Anich Junior Associate EQUES® Law Group