If you have bought a new
home in a metropolitan area in the last 10 years, chances are good
that you automatically became a member of a North Carolina non-profit
corporation called a homeowners association. Membership is mandatory
– which includes dues and compliance with certain rules attached
to your deed called “restrictive covenants.” You may
also share an interest in common areas, such as swimming pools,
playgrounds and open spaces with other members of the association.
For the homeowner and the real
estate developer, a new neighborhood is a business as well as a
community. It is in the best interest of all for the promised facilities
to be built on time, common areas to be maintained and home sales
to go well. After all, a house is usually the largest single investment
many people make – and one which they would like a reasonable
return if, and when, they decide to sell.
So, what is “developer transition?”
Our answer: “Developer transition is a change of government
from a benevolent dictatorship to a democracy.”
In order to better understand
how a community makes this change, one must understand the life
cycle of a typical homeowners association.
The developer has a vision for
the type of neighborhood that he or she wants to build. This vision
determines the roles and responsibilities of the association. If
condominiums are being sold, the responsibilities of the association
are greater than with a single-family association. Since the common
area in a condominium association is actually the exterior of each
building, the association is responsible for such things as exterior
maintenance and insurance. Thus, the dues are higher for a condominium
The developer will prepare the
initial budget, or have it prepared by outside professionals such
as CPAs or association management companies. This budget determines
the dues paid by the individual owners.
The developer’s attorney
then incorporates the association and records the Declaration of
Covenants, Conditions and Restrictions. This makes the owners of
the property mandatory members of the association and obligates
them to abide by the association’s rules and protective covenants
– and to pay assessments or dues.
A board of directors governs the
homeowners association. During the early stages, the developer usually
has the right to appoint members who are often employees of the
developer – and usually has the power to appoint members until
75 percent of the development is sold. It is during this period
that homeowners often raise the issue of conflict of interest since
the best interests of the developer and the association may not
always be the same.
The developer and the association
are two separate legal entities. The developer’s representatives
sit on the board as individuals with no protection from the developer’s
corporate entity. By North Carolina law, these individuals must
exercise good business judgment in conducting the affairs of the
association. The issue of conflict of interest does not go away
when homeowners are elected to the board, as the best interest of
the association may not always agree with the individual best interest.
Homeowners must realize that without
the ability to control the interest of the association until the
development is well under way, developers would not take the financial
risk to start a community. The point at which the homeowners are
able to elect their own representatives to the board of directors
is specified in the Declaration of Covenants.
The transition from developer
control to homeowner control is a mathematical calculation of percentage
of private ownership, which determines when the board is no longer
appointed by the developer – but rather elected by all homeowner
members of the association.