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Understanding the Developer-Controlled Community

Today, several million homeowners enjoy the benefits provided by a homeowners’ association (HOA) lifestyle, but the process of forming an HOA can be lengthy and involve many phases. What begins as a developer’s vision turns into a development, then a developer-controlled community, and finally, in most cases, a homeowner-controlled HOA. Many people—homeowners, prospective buyers, and board members alike—often mistake what that middle factor, the developer-controlled community, represents in this evolutionary process. Read on to get a better understanding of what a developer-controlled community is and how it comes to be.

How Does a Developer-Controlled Community Happen?

Community developments don’t just magically appear. They begin when a developer secures the land, plans the infrastructure, and works to build the foundation of an HOA. A process that can take months, even years, to complete, there are phases of construction, legal paperwork, and more to consider. In short, there are three steps that explain how a developer-controlled community happens.

STEP 1: Community Expansion Project

A developer initiates a community expansion project. A developer must find suitable land, perform a financial study, purchase the property, and then begin the pre-development phase.

STEP 2: Pre-Development

The pre-development phase is when permits and approvals are established to start building. During this time, a lawyer drafts the community association's governing documents, which are customized to protect the development's common elements and home values.

STEP 3: The Developer-Controlled Association

The community association is conceived by the developer, who typically forms a nonprofit corporation to own the land and amenities, and in the case of condos, certain parts of the building exterior. At first, the developer owns all the lots or units in the association; therefore, the developer controls the association.

What’s a Developer-Controlled Community?

The developer initially establishes the scope of the developer-controlled community by setting out the services and expenses in the association’s budget. The declaration provides how the association can enforce the members’ obligations, and the bylaws set forth the procedures for running the association.

A board of directors typically consists of the developer and other individuals professionally related to the developer. With a fiduciary duty to make decisions and set policies that are in the best interest of the association, the board manages all physical aspects, like landscaping and building decisions, and financial and administrative issues, like collecting owner assessments, holding the annual meeting, and enforcing deed restrictions.

The developer may also act on behalf of the board of directors to hire a manager or management firm to delegate much of the association’s day-to-day operations to this third-party manager. While a developer may hire a management company, it’s the manager’s job to carry out the decisions and policies of the board—not the developer.

Developer-Controlled Community FAQs

It can often be confusing to figure out who does what in a developer-controlled community. To clarify roles and expectations, always refer to your community’s governing documents for the most reliable answers. Here are some frequently asked questions—and answers—about developer-controlled communities.

If a community manager is hired, who do they report to?

The manager reports to the entire board of directors and acts at their direction. The manager doesn’t report to the developer or one individual director or committee member unless the board grants a particular individual the authority to handle specific matters. The management agreement between an association and a management company usually stipulates that the board should identify one person to liaison with the manager.

Who pays for the community’s expenses?

Typically, the developer will subsidize or deficit-fund the association until there are homeowners paying sufficient assessments to cover the expenses. The association, whether funded by developer subsidy or owner assessments, pays contractors and other expenses. The board collectively decides on all such transactions.

Where does the assessment rate come from?

A developer creates the initial budget for the association. The board of directors adopts the annual budget and sets the rate of the assessments based on what each lot should pay.

Does the developer pay assessments?

No. In some cases, the developer drafts the documents so that it’s exempt from paying regular assessments. Rather, the developer assumes the responsibility for funding the budget until there are enough homeowners paying assessments to cover all association expenses.

How can homeowners advocate for the association?

Homeowners should have enough interest in their community to present concerns to the board either in writing or in person. While you can submit something in writing to your community manager or board member, other ways to get involved include:

  • Attending board meetings
  • Reading the community newsletter
  • Visiting your community website
  • Contacting board of committee members for updates

When Does a Developer-Controlled HOA Transition to Resident Governance?

Each association has its own specific verbiage and requirements on when and how the transition to homeowner control occurs. Sometimes, the transition happens when a percentage of homes are sold out. Other times, the transition takes place when the developer prepares notice to the association that it’s willing to transition. Always reference the governing documents for turnover and transition specifics, as well as information about post-turnover developer duties.

How to Find the Right Management Partner for Your New Development

At Associa, we deliver exceptional HOA management services, competitive pricing and a suite of programs and services no one can match. While we provide signature developer services that help streamline your operations and help sell homes, we also offer a number of educational resources for new-development leaders.

Click here to learn more about how our vast association management experience can make the development process easier for you or read our article, “Keys to Success for New Development Community Management,” for a list of qualities you should look for when choosing a community management partner for your new development.