BILL ANALYSIS
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|Hearing Date:August 5, 2002 |Bill No:AB |
| |555 |
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SENATE COMMITTEE ON BUSINESS AND PROFESSIONS
Senator Liz Figueroa, Chair
Bill No: AB 555Author:Dutra
As Amended: June 28, 2002 Fiscal: No
SUBJECT: Common interest development managers.
SUMMARY: Makes it an unfair business practice for an
individual to refer to himself or herself as a "certified
common interest development manager," as defined, unless he
or she has met certain specified requirements. Also,
requires common interest development (CID) managers to
provide certain specified disclosures to community
associations, as defined, and makes it an unfair business
practice if disclosures are not made, or persons hold
themselves out as certified if they have not met the
specified requirements.
Existing law:
1)Establishes a scheme for the regulation of common
interest developments, including condominiums, planned
unit developments, stock operatives, and community
apartments under the Davis-Sterling Common Interest
Development Act.
2)Requires a CID to be managed by a "community" association
(association), which may be incorporated or
unincorporated.
3)Requires the articles of incorporation of the associaton
that has been incorporated to be filed with the Secretary
of State's Office along with a statement identifying the
corporation as a CID, the location of the association's
business or corporate office, and the name and address of
the association's managing agent, if any.
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4)Allows the board of directors of an association to
delegate the management of the activities of the
corporation to any person or persons, management company,
or committee, while reserving the ultimate corporate
powers with the board of directors.
5)Requires prospective managing agents of common interest
developments to provide a written statement to the board
of directors which must contain information about the
managing agent's business, any relevant licenses held,
and any other professional certifications or designations
held, including that of a professional CID manager.
6)Defines a "managing agent" as a person or entity who, for
compensation or in
expectation or compensation, exercises control over the
assets of a common interest development.
7)Requires the association to distribute to all of its
members of the association a number of documents
including a statement which includes a summary of the
association's property, general liability, and earthquake
and flood insurance policies.
8)Requires applicants for the real estate broker license
examination and applicants for real estate license
renewal to meet certain education requirements.
This bill :
1)Makes findings and declarations that the management and
operation of CIDs is governed by a complex set of laws
and that besides understanding these laws, CID management
requires fundamental skills in subjects involving finance
accounting, bookkeeping, contract administration, human
resources, and parliamentary procedure.
2)Makes additional findings and declarations that
individuals hired to manage CIDs are not recognized by
law as possessing any education or management skills when
they identify themselves as "certified" and that those
who reside in CIDs or as board members of CIDs need to be
assured that CID managers who identify themselves as
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"certified" have met minimal education requirements and
standards when they offer their services to CIDs.
3)Requires applicants for the real estate broker license
examination and applicants for a real estate license
renewal to include by July 1, 2004, education in the
subject of California law relating to managing community
associations, as defined, that own, operate, and maintain
CIDs.
4)Defines "financial services" as the preparation of
internal unaudited financial statements, internal
accounting and bookkeeping functions, billing of
assessments, and related services.
5)Defines "management services" as administering or
supervising the financial or common area assets of a CID
at the direction of the community association governing
body, implementing resolutions, directives, and governing
documents of the board of directors, and administering
the association's contractual duties.
6)Defines a "common interest development manager" as a
person, or as a partner or other business entity who for
compensation or in expectation of compensation provides
or contracts to provide management or financial services
to a community association.
7)Requires a person, in order to be called a "certified CID
manager" to have passed a competency examination(s) or
achieved a certification designation by a professional
association, as defined, and have received instruction in
California law, as specified, within the previous five
years.
8) Requires that any competency examination and education
provided for a "certified CID manager" by a professional
association, as defined, or a postsecondary educational
institution must meet specified requirements and
standards of the Department of Real Estate or the
American Educational Research Association, and in
conformance with the Equal Employment Opportunity
Commission's "Uniform Guidelines for Employee Selection
Procedures," the Civil Rights Act of 1991, and the
American with Disabilities Act of 1990.
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9)Specifies that the educational curriculum shall be no
less than a combined
30 hours in course work as described and that the
examination shall test competence in the areas of
California law regarding CIDs and in general management
that is related to the managerial and business skills
needed for management of CIDs.
10)Defines a "professional association" as an organization
that has at least 200 members or certificants who are CID
managers in California, has been in existence for 5
years, operates pursuant to Section 501(c) of the
Internal Revenue Code, certifies that the CID manager has
met the education and examination requirements, and
adheres to a Code of Professional Ethics and Standards of
Practice for CID manager.
11)Specifies that a CID manager does not include a CID
management firm.
12)Requires that a person who is a CID manager as defined
disclose to the board of directors of the community
association the following:
a) Whether the CID manager is certified.
b) The name and address of the professional association
that certified the
CID manager, the date the manager was certified and
the status of the
certification.
c) The location of his or her primary office.
d) Whether the fidelity insurance of the community manager
or his or her
employer covers the operating and reserve funds of the
community
association, and that this disclosure requirement
shall in no way be
construed to compel or require that a community
association or CID
manager acquire fidelity insurance.
13)Makes it an unfair business practice for a CID manager,
or a company that employs a manager, or a company that is
controlled by a company that employs a manager to do any
of the following:
a) To hold oneself out or use the title "certified CID
manager" unless they
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have met the education and examination requirements
as specified.
b) To state or advertise for any reason that her or she
is certified, registered,
or licensed by a government agency to perform the
functions of a CID
manager.
c) To state or advertise a registration or license
number unless it is received
pursuant to a statute, regulation or ordinance.
d) To fail to disclose or misrepresent any of the
items previously mentioned.
14)Sunsets this new "Certified Common Interest Development
Manager" law on January 1, 2008, but prior to the sunset
date will require a review by the Joint Legislative
Sunset Review Committee during the Legislature's interim
recess of 2006.
15)Requires that within the statement that is filed with
the community association's articles of incorporation,
that the association indicate whether it's managing
agent, as defined, is certified pursuant to the
requirements of this new law.
16)Requires as part of a statement provided the community
association members that provides a summary of the
association's insurance policies, that the association
also include whether they have fidelity insurance
coverage.
FISCAL EFFECT: Legislative Counsel has determined that
this bill is non-fiscal.
COMMENTS:
1.Purpose. This bill is sponsored by the California
Association of Community Managers (CACM). According to
the sponsor, this bill seeks to minimize the mistakes and
harms which can occur in CIDs by recognizing managers who
have received specified training and education.
2.Background. (The following background information has
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been excerpted from a recent report released on June 13,
2002, by the California Research Bureau (CRB) titled
"Common Interest Developments: Housing at Risk?" It was
written by Julia Lave Johnson who is a Research Program
Specialist for CRB.)
a) What is a CID and how is it governed? A CID is a
development characterized by the individual ownership of
either a housing unit or parcel coupled with the right to
use shared common areas and facilities. There are
estimated to be more than 30,000 CIDs in California
housing approximately six million people. Most CIDs are
either condominiums, which make up about 65 percent of
all CID developments, or Planned Unit Developments
(PUDs), which account for 33 percent. Condominiums are
always multifamily, attached housing such as townhouses
or apartments. PUDs can be single-family detached or
attached units, and in some instances there is no visible
difference between the two. In both types of CIDs,
residents are responsible for maintaining their
individual property while the homeowner association
maintains all common use areas and exclusive use common
areas. Besides maintaining the physical aspects of a
CID, an association may also be responsible for services
such as security and waste disposal.
The developer is responsible for creating a CIDs homeowner
association and in providing its governing documents. A
CIDs primary governing document is its Covenant, Codes
and Restrictions (CC&Rs), but also includes by-laws. If
the CID is a nonprofit corporation, it will also have
articles of incorporation. Incorporated CIDs must file
their articles of incorporation with the Secretary of
State's Office. A small percentage of CIDs are not
incorporated. When the developer sells enough homes to
reduce his or her ownership to less than 25 percent of
the CID, control of the development passes to the CID's
community or homeowner association. All CIDs must be
managed by an association, which is governed by an
elected board of directors. All homeowners are
automatically members of the association. The board of
directors is charged with enforcing the CC&Rs and
maintaining property values. The CC&Rs state, with very
little flexibility, the responsibilities and the duties
of the association and its directors. The courts have
generally found that CC&Rs are binding unless they are
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found to be unreasonable and can only be superceded by
certain state and federal laws.
b) The Evolution of the California CID Law. In 1983, the
Assembly convened a select committee to study the needs
of California CIDs. The result was the passage of the
Davis-Stirling Act in 1985, which repealed the old
condominium act and consolidated a number of sections of
the Business and Professions Code and the Civil Code. In
addition to the Davis-Stirling Act, CIDs are still
governed by numerous other statutes including the
Subdivided Lands Act, the Corporations Code, and the
Nonprofit Corporation Law. CID laws and regulations are
also administered by a variety of state agencies. The
Legislature has held three hearings on CIDs since the
passage of the Davis-Stirling Act. The Act has been
amended more than 40 times since its passage. These
changes mostly relate to due process issues such as
notification and participation, and are aimed at
providing homeowners with greater access to information
about their CID management and governance.
The California Law Revision Commission (CLRC) is currently
studying California CID law, including the Davis-Stirling
Act, and will make recommendations in the next few years
on how to improve the regulation of CIDs. Many experts
criticize California CID law as: (1) Too complicated and
hard to understand; (2) Contradictory; (3) Uneven in it
coverage; (4) Difficult to enforce; and, (5) Offering
weak protection for individual rights. One of the papers
written for the CLRC points out that Davis-Stirling was
never meant to be comprehensive. The Act only provided
solutions for those areas on which the represented
interest groups reached agreement and did not address
many other issues.
3.Problems with CID Management and Need for Recognized
"Certification" of CID Managers. The responsibility for
managing a common interest development is given to the
board of directors through the Corporations Code and the
Davis-Stirling Act, and, in most cases a CID's governing
documents. In order to perform the tasks necessary to
maintain a CID and fulfill obligations to its
homeowners/members, many association boards of directors
hire professional managers. Between 70 to 88 percent of
CIDs are professionally managed. There may be benefits
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to hiring professional management, including CID issue
expertise, specific education in CID management,
knowledge of CID laws, physical management expertise, and
most importantly an understanding of the financial issues
involving the management of CIDs.
Of all the issues affecting future CID viability, CID
directors and managers are most concerned about the
financial security of the CIDs. The areas that cause the
most financial problems or concerns for CIDs are those
involving homeowner assessments, foreclosure, maintaining
reserve funds, and potential litigation. CID management
needs to understand how to budget appropriately for
homeowner assessments to properly forecast future common
area maintenance costs and repairs over the life of a
CID. When homeowners fail to pay assessments there are
foreclosure legal procedures that must be followed. A
percentage of the homeowner assessments are put into a
reserve fund which pays for other costs related to
maintaining the CID property. When there are inadequate
reserve funds maintained it could lead to physical
deterioration of a CID and a decline in property values.
Litigation, because of its high cost, can be a financial
challenge for CIDs. CID boards are sued for both their
failure to enforce CC&Rs and for enforcing CC&R, as well
as other actions such as foreclosure they may take
against CID homeowners. Having inappropriate insurance
coverage for the HOA or none at all could have major
impact on the CIDs future financial security, especially
when it involves protection from litigation.
As argued by most CID professionals, it is crucial for CIDs
to have professional management knowledge and skills to
assure that they can avoid many of the financial problems
that can result from failure to provide for adequate
financing of the CID and to follow state and local laws
regarding CIDs. Current law does not recognize CID
managers who may or may not have met certain training or
education requirements in CID management. Additionally,
it allows anyone to state that that they may have had
some education in CID management, and even call
themselves "certified," even though they have not
attended any recognized educational program in CID
management nor been certified by a recognized
organization. However, there are organizations that
provide voluntary education programs, including the
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California Association of Community Managers (CACM) and
the California Association Institute (CAI). CACM awards
a Certificate of Community Association Manager to its
members and its education courses are approved by the
Department of Real Estate. CAI offers the "Certified
Manager of Community Associations (CMCA) designation.
The National Board of Certification for Community
Association Managers runs the CMCA certification program.
Both CACM and CAI provide similar education programs
with over 30 hours instruction in legal, financial and
management matters involving CIDs. The primary
difference between the two certification programs is that
CACM provides ongoing examinations for it participants
upon completion of specified courses, while the CIA
provides a nationally recognized and validated
examination for its participants.
4.Regulation of CID Managers in Other States. States have
addressed community association management by CID
managers by enacting legislation with varied degrees of
regulation. For example, Connecticut requires CID
managers to register with their Department of Consumer
Protection. The manager must obtain a fidelity bond for
each community association that he or she manages.
Florida has created a Regulatory Council of Community
Association Managers and requires licensure and
examination of CID managers. Nevada mandates that
prospective community association managers fulfill
certification application and education requirements
similar to those in Florida. In Maryland, Montgomery
County requires local registration of CID managers which
primarily supports a dispute resolution program for
dealing with CID issues.
5.Previous Legislation. AB 1893 (Dutra) was introduced in
2000, that would have set up a certification (licensing)
program under the Department of Real Estate, this bill
was held in the Senate Business and Professions Committee
and then was amended dealing with another subject matter.
6.Similar or Related Legislation This Session. AB 643
(Lowenthal) would require that a CID association created
on or after January 1, 2003, be incorporated and that an
existing unincorporated common interest development
association incorporate by January 1, 2005. It also
requires the CID association to submit to the Secretary
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of State additional, specified information regarding the
CID. That bill is currently in the Senate Housing and
Community Development Committee.
SB 1332 (Figueroa) provides for recognition of
certification for home inspectors by making it an unfair
business practice for an individual to refer to himself
or herself as a "certified home inspector" unless her or
she has met certain, specified education and examination
requirements by a professional association, as defined,
and has made required disclosures prior to conducting a
home inspection. Adds to the list of activities that
constitute unfair business practices for home inspectors.
(AB 555 in its current version is modeled after this
bill.)
7.Prior April 30, 2001 Version of AB 555. The prior
version of AB 555 would have created a private California
Common Interest Development Manager Registration Council
(Council) for the purpose of registering individuals who
meet educational and other required qualifications. The
Council would have been made up of six managers with
specified experience plus one attorney with experience in
CID law. It would have only allowed those who were
registered with the Council to manage CIDs for
compensation, and would have required these CID managers
to be covered by fidelity insurance.
8.Opposition to the Prior Version of AB 555. Individual
CID homeowners, some groups of CID homeowners, and those
indicating they are an organization representing CID
homeowners, such as the American Homeowners Resource
Center (AHRC), were opposed to the prior version of AB
555. Some of their concerns centered around the creation
of a Council that was primarily made up of CID managers.
They believed that this would do nothing for the consumer
and would promote self-dealing and self interest on the
part of CID managers who were already certified by CIA
and CACM. There was also concerned that only those that
were registered with the Council would be a allowed to be
hired by the CID association thus promoting, as some
argued, a monopoly-by-statute in an industry that already
dominates consumers and homeowners. It would force
homeowner associations to comply with industry standards
set forth by the industry - not the California education
system or a government regulated entity.
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Criticisms were also made about the actual quality of the
training and education provided by the current
professional associations, CCAM and CAI. At least one
organization, AHRC, indicates that it has received many
reports on how managers mistreat homeowners and that many
of these managers are certified by CCAM and CAI. It was
also argued that this bill might be premature since the
California Law Revision Commission is conducting a
comprehensive study of all legislation affecting
homeowner associations. As explained, one of the
concerns raised at the CLRC hearings is that piecemeal
legislation has made a regulatory scheme that is already
over-complex and forbidding, even more difficult to
understand. The CLRC is considering the consolidation of
these laws so any current legislation should await the
outcome of actions by the CLRC. A final criticisms was
that there did not appear to be any emergency
necessitating the "licensing" of managers. (It should be
noted that the current version of the bill does not
require licensure it only recognizes that those who call
themselves "certified" have at least obtained some
minimum education in the area of CID management.)
9.Opposition to the Current Version of AB 555. The
Executive Council of Homeowners (ECHO) is opposed to this
measure in its current form unless it is amended as
proposed. ECHO is primarily concerned with the
following:
(1) That language which requires disclosure by the CID
manager and the community association whether they carry
fidelity insurance would compel them to purchase fidelity
insurance. (2) That the bill overbroadly states the
financial services to be ascribed to "certified" managers
and should be significantly scaled down, that the
handling of the financial assets of the community
association should only be controlled by the community
association itself. (3) That this bill provides an
overbroad scope of practice for certified managers which
is inconsistent with existing law.
It should be noted that the Author agreed to amend the bill
on June 28th to deal with several concerns raised by
ECHO, however it appears as if ECHO is still opposed
regarding the basic principle of this bill that
recognizes CID managers who are certified by professional
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associations, and believes it places too much emphasis on
the financial services provided by CID managers and
whether they carry fidelity insurance.
10. Amendments Requested and To Be Offered as Author's
Amendments.
The following amendments were requested by the Department
of Real
Estate, the Department of Corporations and the Society of
California
Accountants to clarify provisions of this bill. The
amendments will be offered
as Author amendments before the Committee.
a) On page 4, delete lines 12 through 17, and after line
29, insert: "(K) On and after July 1, 2004, California
law that relates to managing community associations that
own, operate, and, maintain property within common
interest developments, including, but not limited to,
management, maintenance, and financial recordkeeping and
disclosure topics addressed in the Davis-Stirling Common
Interest Development Act."
b) On page 9,line 30, after the period insert: "Nothing in
this part shall be construed to supersede any law that
requires a license, permit or any other form of
registration, to provide management or financial
services."
c) On page 9, line 30, after the period insert: "Nothing
in this section shall preclude a licensee of the
California Board of Accountancy to provide financial
services to a community association in addition to the
preparation of reviewed and audited financial statements,
and the preparation of the community association's tax
returns."
d) On page 10, line 2, after "the" insert: "course
related"
e) On page 10, line 9, delete everything after the word
"the" through line 10
f) On page 10, line 15, delete the period and insert: "or
the course or course have been approved as a continuing
education course or an equivalent course of study
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pursuant to the Regulations of the Real Estate
Commisioner".
SUPPORT AND OPPOSITION:
Support : California Association of Community Managers
(Sponsor)
Attorney General's Office
Numerous CID Managers
Opposition : Executive Council of Homeowners
(Prior Version, April 30, 2001)
American Homeowners Resource Center
Older Women's League of California
Homeowner Awareness Against Tyrannical Measures
Consultant:Bill Gage