Condominium Management Information Owners’ Association When a developer wants to create a condominium (either built from the ground up or the conversion of an existing apartment building to condominium ownership), the developer prepares and records with the public recorder what is variously known as an enabling declaration, master deed, plan of condominium ownership, or condominium subdivision. This document, usually 50 – 150 pages or longer, converts a parcel of land held under a single deed into a number of individual separate property estates (the condominium units) and an estate composed of all the common elements. Survey maps are included to show the location of each condominium unit plus all the common elements. The developer also creates a legal framework so that the unit owners can govern themselves. This is the condominium owners’ association of which each unit purchaser automatically becomes a member. Although the association can be organized as a trust or unincorporated association, most often it will be organized as a corporation in order to provide the legal protections normally afforded by a corporation to its owners. Additionally, it will be organized as not-for-profit so as to avoid income taxes on money collected from members. The main purpose of the owners’ association is to control, regulate, and maintain the common elements for the overall welfare and benefit of its members. The owners’ association is a mini-government by and for the interests of the condominium owners. By-Laws The rules by which an owners’ association operates are called its bylaws. They are prepared by the developer’s attorney and recorded with the master deed. The bylaws provide the rules by which the association’s board of directors is elected and set the standards by which the board must rule. The bylaws set forth how association dues (maintenance fees) will be established and collected, how contracts will be let for maintenance, management, and repair work, and how personnel will be hired and compensated. Covenants, Conditions and Restrictions Finally, the developer must file a list of regulations by which anyone purchasing a unit in the condominium must abide. These are known as covenants, conditions, and restrictions (CC&Rs). They tell a unit owner such things as not to store personal items on balconies or driveways, what color the exterior of the living room drapes should be, to what extent an owner can alter the exterior of his unit, and whether or not an owner can install a satellite television dish on the roof. They will also contain any pet restrictions including number of pets, size limitations and any restrictions as to dangerous breeds. Additional regulations may be embodied in a set of house rules. Typically, these govern such things as when the swimming pool and other recreation facilities will be open for use and when quiet hours will be observed in the building. Voting Rules Once the units in the building have been sold and the association turned over to the unit owners, the unit owners can change the rules. Generally, the bylaws require a 75% unit owner majority and the CC&Rs require a 66% vote from the association members for a change. House rules can be changed with a simple majority or, in some cases, by the board of directors without a vote of the association. Board of Directors Condominium bylaws provide that a board of directors be elected by the association members. The board is authorized to administer the affairs of the condominium including purchasing of hazard and liability insurance for the common elements, arranging for maintenance and repair of common elements, enforcing CC&Rs and house rules, assessing and collecting a sufficient amount of monthly homeowner fees and special assessments, and listening to complaints and suggestions from unit owners as to how the condominium should be run. Board members are usually elected at the annual meeting of the association, are unit owners, and serve for one year. Typically there will be 5 to 7 members on the board, and one will be elected as president, one as vice-president, one as secretary, and one as treasurer. Meetings are held monthly unless added business requires more frequent meeting. Board meetings are usually open to all association members who can them watch the proceeding and provide input. To help spread the work, the board will appoint committees on which owners are asked to serve. Examples are landscaping, architectural, security, clubhouse, and social committees. Directors and committee members are not usually paid for their time. Annual Meetings Once a year the owners’ association as a whole will meet for an annual meeting. Besides the election of board members for the following year, this is an opportunity for association members to vote on major issues such as changes in the CC&Rs and bylaws, monthly maintenance fee increases, special assessments, and any other matters the board feels should be put to a general ownership vote rather than handled at a board meeting. Owners also receive an annual report of the fiscal health of the association and other information pertinent to their ownership. Condominium Management Most condominium associations will employ a condominium management company to advise the board and take care of day-to-day tasks. The management company is usually responsible for finding, hiring, and paying gardeners, trash haulers, janitors, repair personnel, and a pool maintenance firm. The management company collects maintenance fees and special assessments from unit owners, accounts for condominium expenses, handles the payroll, and pays for contracted services. If the association chooses to hire an on-site manager, that person is usually responsible for enforcing the house rules, handling complaints or problems regarding maintenance, making daily security checks, and supervising the swimming pool and recreation areas. The extent of his or her duties and responsibilities is set by the owners’ association. The association should also retain the right to fire the resident manager and the management firm if their services are not satisfactory. Maintenance Fees The costs of maintaining the common elements in a condominium are allocated among the unit owners in accordance with percentages set forth in the master deed. These are called maintenance fees or association dues and are collected monthly. Failure to pay creates a lien against the delinquent owner’s unit. The amount collected is based on the association’s budget for the coming year. This is based on the board of directors’ estimate of the cost of month-to-month maintenance, insurance, legal and management services, plus reserves for expenses that do not occur monthly. Property Taxes and Insurance Since condominium law recognizes each condominium dwelling unit as a separate legal ownership, property taxes are assessed on each unit separately. Property taxes are based on the assessed value of the unit which is based on its market value. As a rule, it is not necessary for the taxing authority to assess and tax the common elements separately. The reason is that the market value of each unit reflects not only the value of the unit itself, but also the value of the fractional ownership in the common elements that accompanies the unit. The association is responsible for purchasing hazard and liability insurance covering the common elements. Each dwelling unit owner is responsible for purchasing hazard and liability insurance for the interior of his dwelling. Thus, if a visitor slips on a banana peel in the lobby or a hallway of the building, the association is responsible. If the accident occurs in an individual’s unit, the unit owner is responsible. In a high-rise condominium, if the roof breaks during a heavy rainstorm and floods several apartments below, the association is responsible. If an apartment owner’s dishwasher overflows and soaks the apartments below him, he is responsible. If patio furniture is stolen from the swimming pool area, the association is responsible. If patio furniture (or any personal property for that matter) is stolen from an individual’s unit, that is the unit owner’s responsibility. Policies designed for associations and policies for condominium owners are readily available from insurance companies. If a condominium unit is being rented, the owner will want to have landlord insurance, and the tenant, for his own protection, will want a tenant’s hazard and liability policy. Because each condominium unit can be separately owned, each can be separately financed. Thus, a condominium purchaser can choose whether or not to borrow against his unit. If he borrows, he can choose a large or small down payment and a long or short amortization period. If he wants to repay early or refinance, that is his option too. Upon resale, the buyer can elect to assume the loan, pay it off, or obtain new financing. In other words, while association bylaws, restriction, and house rules may regulate the use of a unit, in no way does the association control how a unit may be financed. Since each unit is a separate ownership, if a lender needs to foreclose against a delinquent borrower in the building, the remaining unit owners are not involved. They are neither responsible for the delinquent borrower’s mortgage debt nor are they parties to the foreclosure. Loan terms offered condominium buyers are quite similar to those offered on houses. Typically, lenders will make conventional, uninsured loans for up to 80% of value. With private mortgage insurance, this can be raised to 90% or 95%. On FHA-approved buildings, the FHA offers insurance terms similar to those for detached dwellings. Financing can also be in the form of an installment contract or a seller carryback. If a project is not already completed and ready for occupancy when it is offered for sale, it is common for the developer to require a substantial deposit. The best practice is to place this in an escrow account payable to the developer upon completion. Without this precaution, some developers will use deposits to help pay the expenses of construction while the building is being built. Unfortunately, if the deposits are spent by a developer who goes bankrupt before the project is completed, the buyer receives neither a finished unit or the return of his deposit. If the deposits are held in escrow, the buyers do not receive a unit but they do get their deposits back.