How To Start A Condo Association

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
www.briankrason.com