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How Was Your Money Attended to Pre-Transition?

By Alan E. Tannenbaum

Florida community associations are big businesses, with annual budgets for larger projects running into the tens of millions of dollars. At its inception to the point of transition to owner control (which usually is at least a couple of years), each association is operated by a board of directors appointed by the developer. During this "pre-transition" period, these developer-appointed directors are running the business of the association (collecting revenue, expending money, contracting for services, performing maintenance, establishing or waiving reserves, etc.). From the point each new owner closes on their unit or parcel, each is a shareholder and contributing member in the association.

Developer-appointed directors of Florida community associations have a fiduciary duty to the members of the association. In essence, they are charged with operating the association during the pre-transition period in accordance with statutory and documentary requirements and good business practices. It is a prudent practice for the initial owner board of directors post-transition to review association operation pre-transition to assure that association finances were properly administered. Possible issues to be explored are:

1. Were all assessments collected and in the appropriate amounts?
2.  If there was a developer guarantee, was it funded in the correct amount?
3. Were reserves funded?
4. Were association funds expended only for association purposes?; and
5. Were contracts entered into fair and reasonable?

We strongly recommend that every Florida community association upon going through transition retain a forensic accountant knowledgeable in community association matters to review the developer's audit of pre-transition finances, as well as financial records of the association turned over as part of the transition process, and to provide an opinion on each of these issues.

Full post as published by Florida Community Association Construction Law Blog on December 30, 2008 (boomark / email).