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By Amalia "Mia" Gonzalez, 3.0 Management

As the growing residential real estate market in Colorado continues to support new housing projects across the State, developer to owner transitions are becoming more common. It is essential for Community Association Managers to familiarize themselves with the process and legal requirements for these transitions as it is a critical step every developing homeowners association must take. 

The biggest tool a Community Association Manager should have in their toolbox during a transition is the Colorado Common Interest Ownership Act (CCIOA), as this document prevails over the Declaration. The next tool every manager should utilize is homeowner engagement. Without willing homeowners, there is no Board of Directors. In order to acquire homeowner engagement there needs to be consistent communication. Communication is key for any successful and smooth transition from declarant to owner control. The purpose is to educate the owners on the role that the Board of Directors plays for the association and the function of an association. 

Preparation for the transition meetings should occur before the first unit is sold to ensure that the timeframe and requirements are met. CCIOA requires that associations sequentially be turned over to the owners as units are sold. Typically, three special meetings are anticipated during the declarant control transition. There could be more meetings (and possibly fewer meetings although fewer meetings are not recommended). Per Section 303 (6) and (7) of CCIOA:

1. (First Meeting) Not later than 60 days after conveyance of 25% of the units that may be created to unit owners other than a declarant, at least one member and not less than 1/4 of the members of the executive board must be elected by unit owners other than the declarant;
2. (Second Meeting) Not later than 60 days after conveyance of 50% of the units that may be created to unit owners other than a declarant, not less than 1/3 of the members of the executive board must be elected by unit owners other than the declarant;
3. (Third Meeting) Not later than the termination of any period of declarant control, the unit owners shall elect an executive board of at least three members, at least a majority of whom must be unit owners other than the declarant or designated representatives of unit owners other than the declarant. The executive board shall elect the officers. The executive board members and officers shall take office upon election.

Per Section 303(5)(a)(I) of CCIOA, the declarant control termination limits are as follows:

1. 60 days after conveyance of 75% of all units that may be created (defined in the declaration) to owners other than the declarant; or
2. 2-years after the last conveyance of a unit in the ordinary course of business; or
3. 2-years after the right to add new units was last exercised.

Within 60 days after the earliest of these three events occurs, the third meeting must commence, records must be turned over, and a transition audit performed. 

Within 60 days after the owners have taken control of the association, the declarant must provide several required documents per CCIOA Section 303(9). A few worth mentioning are the governing documents (recorded declaration, articles of incorporation, bylaws, plots and maps, meeting minutes, etc.). Obtaining and understanding the governing documents will lay the foundation for the association’s operation and maintenance needs. All financial information is another element that is essential to the transition. This should occur when the owners have the majority control of the Board. It’s prudent to consider an owner board member serving as the board treasurer before the transfer of control to reduce owner concerns and reassure order for the association’s bookkeeping. A transition audit should also be performed, accounting for the association’s funds and financial statements from the date the association began receiving funds to the date when the declarant control period ended. It is highly recommended that this audit is performed by an experienced CPA.

Keep in mind that the best time to start the transition is six months prior to the official declarant to owner transition. Waiting until, during, or even after the transition, may make it more challenging to obtain important and necessary documents from the developer. 

Once the owner controlled Board has taken over the association, the Board should consider the following: 

• Retention of the managing agent, attorney, and accountant. The Board has the right to select and hire experts that will represent and act in the association’s best interest;
• Engage with experts to inspect and review plans and specifications of the community; Experts are able to provide an unbiased opinion on the construction of the development, provide an opinion on defect repairs, and how much repairs will cost;
• Obtain and keep a record of the written report after the inspections;
• Ensure all required records per CCIOA have been obtained;
• Review current insurance policies. All associations formed after July 1, 1992 must carry property, liability, and fidelity insurance coverage at a minimum. Boards should also check the governing documents for any additional coverage the association may be required to carry like directors and officers, umbrella, and workers’ compensation insurance;
• Review financial information for completion and accuracy;
• Engage with an attorney for a legal document review to ensure the association is compliant with local, state, and federal laws;
• Engage with an expert to prepare a reserve study. A reserve study will help the association determine the useful life and cost of major replacement assets allowing the Board to effectively plan for the future;
• Conveyance of Common Areas; and
• Review prior enforcement actions, if any.

In conclusion, the transition from developer to owner control is an important part of the life of an association. There is a lot to be done but ensuring the transition is smooth requires knowledge, preparation, and clear communication. Complying with legal requirements and working within the set timelines during the transition process will set the association up for success in the long run. 

Amalia Gonzalez also known as Mia is the Community Association Manager of Developer Relations at 3.0 Management. Mia has been in the industry for 5+ years and has a passion for making communities a better place to live for owners.