Transfer of Power
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TRANSFER FROM DEVELOPER TO OWNERS

QUESTION: When does the membership officially take control of the HOA from the developer?

ANSWER: At the outset, the developer has most of the votes, controls the board, and appoints the architectural committee. However, the California Department of Real Estate ("DRE") requires that developers gradually give up control in each area.

Voting Structure. Developers retain control by creating a two class voting structure. Class A is usually the homeowners, each of whom get one vote for each lot or condominium owned. Class B is usually the developer. The developer has three votes for each lot or condominium he owns. In a single phase project, Class B converts to Class A when either the total number of Class A votes equals the total number of Class B votes or on the second anniversary of the conveyance of the first lot or condominium in the project, whichever occurs first. In a multi-phase project, Class B converts to Class A either on the second anniversary of the first conveyance in the most recent phases or four years after the first conveyance in the project, whichever occurs first.

Even when the developer has voting control, for certain votes, such as amendments to governing documents, the DRE requires approval by a majority of both Class A and Class B, effectively giving homeowners a veto on some issues.

Director Elections. Starting with the first election, a procedure must be established that ensures at least 20% of the directors are elected solely by homeowner votes. Once the homeowners elect a director, only the homeowners can remove the director. Eventually, as the homeowners get more votes and Class B converts to Class A, the homeowners will elect all of the directors. The timing will vary from project to project depending on the pace of sales and number of phases in the project.

Architectural Committee/Design Review Committee. The developer has the right to appoint all of the members of the committee until one year after the first (or only) final subdivision public report for the project. After that, the board must have the right to appoint at least one member of the committee until either close of escrow for 90% of the lots and condominiums in the project or five years after the first final subdivision public report was issued, whichever occurs first. After that, the board has the right to appoint all committee members.

Caveat: The DRE may approve alternate arrangements and the DRE's rules have changed over time. To find out when control is turned over for your association, you must read the articles of incorporation, bylaws and CC&Rs. Also, the DRE's rules for master planned communities (usually 500 or more homes) are different from the rules for smaller subdivisions. In general, developers are allowed to control master planned communities for a much longer time.

Fiduciary Duties. Even when the developer controls the board of directors, he cannot use his power to his own benefit at the expense of the association. (Corp. Code §7231, Raven's Cove v. Knuppe Development (1981) 114 Cal.App.3d 783.)

NOTE: The association is normally not the successor in interest to the developer.

ASSISTANCE: Associations needing legal assistance can contact us. To stay current with issues affecting community associations, subscribe to the Davis-Stirling Newsletter.

Adams Stirling PLC