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Condo association fears developer's bankruptcy

Posted on Wed, Nov 04, 2009 @ 05:57 AM

I am an owner of a condo unit but not on the condo association board. I am worried that our developer will never pay his back condo association dues from the units he owns and rents ( a considerable amount) extending to the condo association. The developer formed a shell corporation from which we bought our condo. (We assume that all owners in our condo building had the same experience.)

The condo association board seems scared to take any action in the fear that the shell corporation will go bankrupt. With proxies, the shell corp. has control of the voting for condo board members. Any suggestions for action?

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Condo association asks about contruction defect litigation

Posted on Sun, Nov 01, 2009 @ 07:05 PM

Our condo association just had our developer transition after many unsucessful attempts to get quorum.

Although most everything is ok with the condo units themselves, the developer cut corners on asphalt and concrete. Our asphalt drives are sinking and developing huge cracks and potholes, beginning at only 2-3 years old.

In addition, concrete sidwalks and porches are severely pitted and/or laminating where large flat pieces are crumbling off the tops. Several have more missing concrete than remaining. One townhouse has had its entire front porch break away from the building and slowly sliding away, others have their sidewalks sinking. This subdivision is only 3-6 years old, but this has been ongoing for years.

The matter was addressed with the condo developer previously and they made some insufficient patches. We had a civil engineer look at our dilemma and as for the common drives, he estimated that the asphalt is less than 2" (closer to 1") thick, and poured on ground that was not properly prepared.

Illinois has a 10 year structural construction defect law. Does this apply to asphalt and concrete? Do we have any legal recourse to go after the builder on these issues?

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Should engineer do construction defect inspection of condo association building?

Posted on Mon, Sep 28, 2009 @ 08:27 AM

I'm a member of a condo board of a newly constructed low rise in New Jersey. Construction was completed during the past year. Although the developer still retains about 1/3 of the units, he has relinquished control of the condo board. We've had our initial condo association elections, and the board has met several times.

My question(s) relate to the need for engineering reports. I've heard from certain sources that engineering inspections and reports are advisable during the developer transition process. While I understand why this would make sense, I'd like to know a bit more about what is customary, and whether it's really necessary in incase of any indications of any construction defects.

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Condo Associations and the Importance of Committees

Posted on Thu, Jun 04, 2009 @ 02:10 PM

Condo Association committees are important to condo assocations because it gives its members, that may not have the time, skills or desire to be on the condo board, a chance to get involved in the condo assocation in other meaningful ways.

Being part of an association committee can renew a condo assocation member's pride of ownership which will create a stronger condo association or HOA by strenthening the owner's feeling of being vested in the property. A strong sense of vested ownership is the backbone of a good condo association. It's also a good way to pull absentee landlords into participation.

Most importantly, it lets some people other than condo association board members do some work! Let's not forget - being on the condo association board is not always about doing the work yourself. You should leverage committees to get other association members involved.

Some Committees your Condo Assocation or HOA can form:

Financial Audit Committee -
Committee should meet at least once per quarter to review the condo association's financials. Is the condo association spending too much money? Is there enough reserve? Are the condo fees covering the true costs of maintaining the property? A Financial Audit Committee should review the condo budget and make recommendations to the condo trustees or board. This should be done regardless if there is a property management firm in place or not.

Social Committee - Would it hurt to have a drink with your neighbors once or twice a year? A social committee is an easy way to get people involved to do the party planning.

Project Committee - We recently assessed to renovate our lobby and three assocation members that have never been too involved before offered to oversee the renovation and are doing a great job. Most importantly, the are excited about the project and how it will impact the building. Once again, it also gives the perpetual condo board members one less thing they have to oversee.

Security Committee - Is your HOA concerned with crime or liability? A Security Committe should look at the property and things that can be done to mitigate crime or injury that may occur on premise. Recommendations should be made to the Condo Association Board.

Learn about HOA Collections, Insurance and Loans

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Watch Out: Developer Transitions to Condo Associations and HOAs

Posted on Thu, May 28, 2009 @ 09:56 AM

Builders are leaving un-built homes, causing hardships for condo associations. Imagine a community association of 450 lots with a community association pool and clubhouse. Now with only 225 homes closed, these condo association members are in for a shock. Condo association fees may double. In the past, builders would make up shortfalls in the HOA budget, but most builders are now cash-strapped and cannot support the condo association. Does the condo association board up the clubhouse and shut the pool?

Condo developers in trouble have been around for many years. Underfunded HOA reserves, incomplete roads, building defects and unpaid bills could end up as liens on the common property. Condo developers often create a Limited Liability Corporation for each community association and may end up judgment-proof if they run out of condo reserves.

If the condo association thinks the condo developer may be in financial distress, involve the condo association's attorney as soon as possible. Many condo associations use the condo developer's attorney, but, that could be a conflict when the two parties have competing interests. If the condo developer who still maintains a majority of seats on the condo association board disappears, the homeowners association members should band together to elect their own HOA board of directors, if authorized in the HOA documents. If not, perhaps electing an advisory, or informal, condo board, is a workable option to ensure that the owners are involved in the operations of their condo association.

Keep the local government informed regarding the financial status of the condo association. The condo owners will be looking to them for help. The municipality may hold bond money or guarantee bonds; ask that these not be allowed to lapse without the homeowner board signing off on them. The municipality may also provide insight on the condo developer.

If there is a HOA loan on which the condo developer defaulted, the bank may foreclose on the remaining parcels of land. Work with the condo association's attorney to ensure that the condo association lender pays all legally-due unit/lot condo assessments, set-up fees and amounts related to newly-closed units such as the working capital, HOA reserve, long-term HOA reserve and condo association fees. The bank will normally assign a real estate company to work out any sales or leases. The condo association should alert the company to any open balances in owners' accounts. Many banks want to work with the condo associations so they may have a clear title when they make a sale.

If the condo developer files bankruptcy or is deliquent, a receiver, or trustee, will be appointed by the court. Receivers/trustees have the same rights as the condo developer did, including condo board appointments and contract approval.

If there is a major shortfall in condo reserve funds, additional HOA special assessments may be needed. Condo association budgets will need to be reworked based on the number of closed units/homes. Be prepared to negotiate condo fees for fewer services. Condo developers like to keep condo fees low in order to maximize loan qualification by prospective buyers. Does the condo association reduce services or increase special assessments? 


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How Do Developers Finance Condo Associations and HOAs?

Posted on Fri, Feb 13, 2009 @ 05:42 AM

Often, a condo developer takes out a loan from a private bank or mortgage company and uses it to create an HOA or PUD, that is, he or she will build a condo complex or subdivision and create an HOA to manage it. The HOA membership consists of the property owners in the HOA development or condo building.

A typical loan is called an "interim loan," and it's not intended to be long-term or "permanent" financing. Rather, it's repaid as "units"-either condos or homes-are sold. So, the units in the HOA or PUD are like "inventory," and the interim loan enables the developer build and sell units until the project is complete and all units are sold.

When a unit is sold, the buyer-owner will be subject to a number of governing HOA documents for the development. This can include the HOA's covenants, conditions and restrictions ("CC&Rs"), which typically restrict and limit how the owner can use the property. Examples of CC&Rs include things like a ban on pets and how many cars you can park in the parking lot.

Typically, anyone who buys a home within the HOA's boundaries automatically becomes a member. Member-owners are then charged fees and assessments, which are usually charged and collected monthly, and are used for things like landscaping, snow removal and road maintenance. Also, there may be special assessments, which are used to pay for emergency repairs or repairs and maintenance costs that were not included in the HOA's budget.

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9 Questions to Ask Before Buying a Condo

Posted on Wed, Feb 11, 2009 @ 06:57 PM

My advice when out condo shopping is simple: ask as many questions as possible.  Here are my top questions:

  1. What are the assessments or condo fees?
  2. What do the assessments pay for? What don't they pay for?
  3. Is the condo building self-managed?
  4. If the condo building is managed by a property management company, what is the company? (Do some research and find out if they are reputable.)
  5. How much money is in condo reserves?
  6. Are there any special assessments now or expected?
  7. Has there been any updating to the building, and if so, did the condo association do a special assessment or did they use funds from reserves?
  8. Are there any pending lawsuits against the association?
  9. Is there an outstanding condo association loan or debt?

Many first-time condo and townhouse buyers don't completely understand what they're getting into. It's not bad, but it is something that should be understood completely before signing the mountain of papers at the closing!

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Condo Associations Need Smooth Transitions From Developers

Posted on Fri, Jan 30, 2009 @ 07:18 PM

A common interest ownership community (Condo Associations or HOAs) goes through a formative period comparable to a child’s early years. And for a newly minted homeowner association, it is the transition from developer to condo board and condo owner control that plays the pivotal role, shaping the condo associations future development and largely determining its chances for success. What happens before, during and after the developer transition will determine whether a fledgling condo association gets off on the right foot on the path to self-governance or stumbles out of the starting gate and then struggles, perhaps for years, to find its footing and regain its balance. The developer transition, in short, can make a new condo association or break it. The time for owners to begin thinking about the transition and preparing for it is long before it occurs.

The foundation for a smooth developer transition actually should begin, although it doesn’t always, with the property developer. The property developer initially owns all the condo units and so appoints and controls the condo association’s first condo board. State law and the condo associations governing condo documents will define the point at which the developer must turn over control to a condo board elected entirely by the condo owners. These requirements differ, but, property developers typically must begin appointing condo owners to the condo board when a specified percentage of the condo units have been sold, adding more owners progressively as more condo units are sold, and completing the transition to an owner-elected condo association board within a specified period after the condo association is created or after a designated percentage of the units have been sold.

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Monitoring Condo Developer Transition Process

Posted on Fri, Jan 30, 2009 @ 09:51 AM

Keeping Watch Over The Condo Developer Transition

As part of their transition preparations, the advisory committee should track the decisions of the developer and the developer-controlled board. They should attend condo board meetings, if possible, review the minutes of board meetings, monitor the pace and progress of ongoing construction, pay attention to condo association finances, condo fees and begin identifying potential condo management and construction-related concerns.

Even if the condo committee lacks the formal blessing of the condo developer, as condo owners, condo committee members are entitled to review the condo association's records, including its condo association financial records. They have a right to look over the developer's shoulder and to question condo management decisions they don't like or don't understand. The developer still controls the condo association at this point, but owners have a vested and long term interest in the community's future.

The condo committee should be able to gauge early on how much or how little cooperation condo owners can expect from the developer. If the relationship is positive, with good communication and give-and-take on both sides, the condo association committee should arrange to meet periodically with the condo developer and begin creating a mutually agreeable "punch list" of construction issues and condo association management problems for the developer to address before the transition.

One of the major concerns for a new condo association is the possibility that home owners will discover serious construction defects that need to be resolved. If the condo developer is less than cooperative during the developer transition period - if he resists requests to correct even minor problems -- it is probably reasonable to assume that he will not become more cooperative after relinquishing control. Cond boards confronting this situation may want to consider hiring an construction defect litigation attorney to represent them before the developer transition. This is especially true if there are reasons to suspect that the condo developer is mismanaging condo association reserve funds, or if it appears likely that condo owners will want to pursue a construction defect claim. The condo developer at this point still controls the condo association's finances and is unlikely to allocate funds for an attorney who may eventually represent the owners in a suit against him. So condo owners would have to pay any pre-transition legal costs out-of-pocket, but depending on the situation, that may be money well spent.

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How To Start A Condo Association

Posted on Thu, Jan 29, 2009 @ 09:57 PM

Starting a Condominium Association
The process of starting a condominium association is much more than a legal process and legal advice is certainly recommended. This article will explain another side of the process which most people are unfamiliar with, unaware of and need to learn. It has been said that I have managed condominiums since the documents were on scrolls; but the truth is the process has not changed much since my first condominiumisation occurred in 1981. The process starts with a piece of property that is not limited to residential but may be a group of commercial stores, a small office park, a group of boat slips in a marina or horse stables in Groton, MA where I board my horse.


Condo Documentation
With the help of an attorney you would need to prepare two documents; a Declaration of Trust and a Master Deed. The master deed is the legal document where the condominium is located, what it is made up of and how the building is divided into common areas, limited common areas and the number of units along with the percentage of interest declared to each unit. The declaration of trust is just that a document declaring this building as a condominium trust. It would describe the date of filing, declaring the original trustee or trustees and how in fact the trustees are chosen to succeed the original group. In detail the process of meetings and general rules for the running of the condominium are described in this document.

Typically once 51% of the units are sold there is what we call a “turnover”. This turnover is when the original developer loses control of the condominium and an elected board of trustees is put in place. In too many cases this time frame extends because people purchasing the original 51% interest are unaware of the turnover and issues involved. In my opinion allowing the developer to remain in control can lead to chaos since the priorities of the developer can be different from the priorities of homeowners. The developer’s short-term motive can be to keep fees down to make his final sales more attractive. The homeowner’s priorities are to think long term and begin building reserves for future capital expenses and to adequately fund operating accounts and reserves.

These priorities can be so different that gaining control as quickly as possible assures two things. First, to evaluate income and expenses and project realistically since the first 51% of owners have to work with the last 49%. Allowing fees to remain low will almost certainly entice buyers to overbuy and in the end cause financial unrest. I always encourage developers to be as realistic as possible and to fairly allow buyers to understand the investment they are making. To be honest, this rarely happens and the industry standard is for initial units to be offered with understated condominium fees to make them very attractive. This allows buyers to qualify for more home than they might otherwise. The issue caused is no different that what is occurring in the adjustable rate mortgage industry but there is an unwritten code with developers and management companies that it is a common and acceptable practice. How many people have purchased a condominium only to find when a management company comes along fees can escalate significantly?

Finding a good transition company for any condominium can be the key to protect the interest of buyers. Most, if not all, associations hire a management company at this point and look for advice. The problem is the developer may be offering additional buildings to the management company. Where is the fiduciary responsibility? More times than not it lies inappropriately with the developer since weighing the small monthly fee against future business is the deciding factor. A transition company has nothing to benefit from the developer and assures the interest of the trust is protected. I have been successful many times over the years recovering by attaching the last unit(s) a developer is trying to sell to force a clean transition and to recover any lost value for understating income and expenses on the initial budgets or by under-constructing somewhere in the building. This can be a tricky and complicated process and not always one that ends in the advantage of homeowners. Once I saw a board spend over twenty five thousand dollars in legal fees to force a developer to do twenty thousand dollars worth of work.

Discovering issues early and staying on top of them can be more effective than playing “gotcha” later. The rule to remember is transition control as soon as the documents allow. I would also encourage not filing “boiler plate” documents rather “knowing what we know now” about condominiums each set of documents should be tweaked. Anyone who has been involved with a master deed or trust change would agree that starting off right is the best bet for success.


The Condo Association Transition

Once control of the condominium is done the documents should be read and followed. Collection of fees, documentation of meetings and a transition study should be done and paid for by the developer. In addition, it is never too early to start thinking about a reserve study. I always suggest to my initial board at the turnover date to negotiate with the developer to pay for the transition report. The association should then consider paying the additional money to convert this report into a reserve study. The additional money is small and will save the association a lot of money in the long run. Proper financial planning can occur with this reserve study since it will tell the new board what the amount of “adequate reserves” is going to be when writing the budget. That is the answer by the way to adequate reserves – not keeping fees low to sell units or look attractive.


Condominium Living
That’s it in a nutshell. I am not sure the idea of the article was how to avoid the pitfalls of developing a condominium but the process is not void of proper planning and knowing what to ask as an informed buyer or investor. The process of starting a condominium is much more than filling documents and coming up with a name. It is hard work that certainly does not end with signing on the dotted line and becoming linked to a group of strangers for the duration of your ownership/investment. Rather, starting a condominium continues through the original appointed board, into the first elected board and for many years after and really never stops. The official “condominiumisation” is somewhat easy but the starting of a condominium goes on well beyond the developers, contractors and vendors who build out the common areas. It is picked up by the board of trustees and really never stops since proper management will make everyone’s job easier but never done!

Brian Krason, President/CEO
Krason Consulting

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