Problem with transition from developer to owner managed HOA

We are just about to transition from developer-managed to owner-managed HOA. We have a problem in that the developer didn't for a separate corporate entity (or entity of any type) for HOA funds/budget. Developer has been collecting dues and running HOA from his regular development corporation for past 3 years.

Now we are to transition to owner-managed HOA and he just wants to write a check and be done with it. We have no entity to receive the funds, or to carry on HOA business. We can get this set up, and use an escrow service, given some time.

However, how does this affect the CCRs? The CCRs reference the developer's corporation as the legal entity. Do they need to be re-written and voted on by all homeowners, a brand new HOA started from scratch or can we simply create the entity and proceed?

We (incoming board) are stumped on this one. Any advice appreciated!

Thanks, I think we need to be very careful as well. I'll check the deed, too.

I understand he should have had a separate account, but he says since he tracked it separately, he's got that covered.

We definitely need an audit, and an attorney, to get through this one.

When we transitioned it was not that difficult and the main reason was our declarant was very above board on everything. He had always maintained the HOA Budget/Books separate from any of his other businesses. It was all there in black and white and had been presented to owners once a year at the Annual Meeting.

We just had to work out the details. We went with an appointed BOD (the same one in place before the transition) for the turnover on 01/01 and we had a BOD election at our Annual Meeting in April of that year. 4 of the existing appointed 5 were elected and one non-appointed owner was elected to the 5th position.

yes, but I am hopeful he will be cooperative.

I am primarily concerned with whether or not a newly formed corporate entity with a different legal name than that which is on the CCRs can take over and become the HOA. That's our most pressing issue right now.

Has that ever happened in an organization you know of, or has the developer always had a separate entity for the HOA?

CCRs only say that a 'community maintenance fee' shall be payable, currently at $xxx per year. Details will be spelled out in the Annual Home Owners Association report.

The annual Home Owners Association report says the following:

XYZ shall mean XYZ, Ltd. (developers corp)
XYZ HOA shall mean XYZ Home Owners Association

and then in another paragraph:

"XYZ HOA is a nonprofit corporation organized and existing under the laws of _____________ and charged with the duties and vested with the powers prescribed by law and set forth heretofore and as such may be amended from time to time."

So there is a legal entity spelled out, but it doesn't exist. To me, it sounds like he should have created XYZ HOA as a separate nonprofit entity and dues should have been paid to that entity, budget run from there, etc.

Instead, he used Quickbooks accounting to separate XYZ, Ltd and XYZ HOA without creating a separate entity. And now he wants the owners to create the entity ourselves and he just writes us a check for whatever is left on the books.

I am incredibly uncomfortable with the legal ramifications, and tax implications of this. Not to mention liability of new board members until such time as the new entity is created.

Thanks Larry. This is my feeling, too. The blank is actually filled in, I just didn't want to name it in this forum. But it does look like boilerplate for sure, and you may be correct that it is not enforceable. No matter what, he should have created that entity! Either before the first lot sold, or before he ever took a check for 'dues'.

Thanks! I agree that it is not very responsible, at the very least, and potentially bad bad news at the worst. I'm glad to know you don't think it would be a problem to create the entity after the fact, since it is mentioned in the docs. If nothing else we can start from scratch with that.

Check your county codes. In my county there are dozens of chapters under the title "Land Development Regulations". One of them provides

"... the owner shall establish a landowner's association and simultaneously file a declaration of covenants and restrictions, acceptable in form to the county attorney."

That's a requirement (in this county) for approval of county to establish an HOA in a new subdivision. If your developer skirted similar provisos in your county's land development regulations, lord only knows what else he did improperly. There are all sorts of obligations developers have before turning over control to the homeowners. Nightmare scenario IMO.

Don't agree.

Registering the corp establishes statutory protection for the individual owners. Doesn't matter who files the paperwork. The sooner the better.

It's an easy fix. Filing does not create new liabilities. Whatever liabilities there are, they already exist. The objective is to create corporate protection for the homeowners.

The liability of the developer is a totally separate issue. He could file for bankruptcy tomorrow - He could refuse to do anything - Should the homeowners sit on their hands and wait for him to do something that he should have done before he started building? IMO no.

Create the corporate umbrella. Then fix everything else as quickly as possible.

I have many of the same concerns as you.

As I understand things, a developer still has liability until turnover. Turnover happens when the developer releases control and responsibility and the homeowners accept control and responsibility. If you read my earlier post, I recommended against the homeowners accepting control and responsibility until they have investigated and decided they are ready.

Filing articles of incorporation does not trigger a turnover. As stated above, turnover can't happen without acceptance.

Multiple smiley-faces.

we don't have an attorney at this point. We are just a handful of owners who have been nominated to the board once transition occurs. However, we will be consulting an attorney about this transition to be sure.

Attached is information to consider.