BILL NUMBER: AB 2718 CHAPTERED 09/24/04 CHAPTER 766 FILED WITH SECRETARY OF STATE SEPTEMBER 24, 2004 APPROVED BY GOVERNOR SEPTEMBER 24, 2004 PASSED THE ASSEMBLY AUGUST 25, 2004 PASSED THE SENATE AUGUST 23, 2004 AMENDED IN SENATE AUGUST 18, 2004 AMENDED IN SENATE JULY 6, 2004 AMENDED IN SENATE JUNE 28, 2004 AMENDED IN SENATE JUNE 17, 2004 AMENDED IN ASSEMBLY MAY 25, 2004 AMENDED IN ASSEMBLY APRIL 12, 2004 INTRODUCED BY Assembly Member Laird FEBRUARY 20, 2004 An act to amend Sections 1365, 1365.5, and 1368 of, and to add Sections 1365.2.5 and 1365.3 to, the Civil Code, relating to common interest developments. LEGISLATIVE COUNSEL'S DIGEST AB 2718, Laird. Common interest developments. Existing law, the Davis-Stirling Common Interest Development Act, governs common interest developments. These provisions require, among other things, that the association of a common interest development prepare and distribute specified financial statements and other documents to the members of the development. Upon written request, the association must also provide the owner of a separate interest in the development with a copy of specified documents concerning the development. The association is authorized to charge a fee for this service not to exceed the association's reasonable cost to prepare and reproduce the requested items. These provisions also require the board of directors of a common interest development to cause to be conducted, under certain circumstances, a visual inspection of accessible areas of specified major components of the development at least once every 3 years as part of a study of the reserve account. This bill would, among other things, revise provisions governing the preparation and distribution of financial and other documents to members of the development, require certain community service organizations, as defined, to prepare and distribute a specified financial statement, and set forth a specified form regarding assessment and reserve funding disclosures. The bill would also provide that an association may charge a reasonable fee for providing copies of specified documents to the owner of a separate interest, and that these items may be made available in electronic form, as specified. The bill would provide that its provisions apply to reports and disclosures made after July 1, 2005. THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS: SECTION 1. Section 1365 of the Civil Code is amended to read: 1365. Unless the governing documents impose more stringent standards, the association shall prepare and distribute to all of its members the following documents: (a) A pro forma operating budget, which shall include all of the following: (1) The estimated revenue and expenses on an accrual basis. (2) A summary of the association's reserves based upon the most recent review or study conducted pursuant to Section 1365.5, based only on assets held in cash or cash equivalents, which shall be printed in boldface type and include all of the following: (A) The current estimated replacement cost, estimated remaining life, and estimated useful life of each major component. (B) As of the end of the fiscal year for which the study is prepared: (i) The current estimate of the amount of cash reserves necessary to repair, replace, restore, or maintain the major components. (ii) The current amount of accumulated cash reserves actually set aside to repair, replace, restore, or maintain major components. (iii) If applicable, the amount of funds received from either a compensatory damage award or settlement to an association from any person or entity for injuries to property, real or personal, arising out of any construction or design defects, and the expenditure or disposition of funds, including the amounts expended for the direct and indirect costs of repair of construction or design defects. These amounts shall be reported at the end of the fiscal year for which the study is prepared as separate line items under cash reserves pursuant to clause (ii). In lieu of complying with the requirements set forth in this clause, an association that is obligated to issue a review of their financial statement pursuant to subdivision (b) may include in the review a statement containing all of the information required by this clause. (C) The percentage that the amount determined for purposes of clause (ii) of subparagraph (B) equals the amount determined for purposes of clause (i) of subparagraph (B). (3) A statement as to both of the following: (A) Whether the board of directors of the association has determined or anticipates that the levy of one or more special assessments will be required to repair, replace, or restore any major component or to provide adequate reserves therefor. If so, the statement shall also set out the estimated amount, commencement date, and duration of the assessment. (B) The mechanism or mechanisms by which the board of directors will fund reserves to repair or replace major components, including assessments, borrowing, use of other assets, deferral of selected replacement or repairs, or alternative mechanisms. (4) A general statement addressing the procedures used for the calculation and establishment of those reserves to defray the future repair, replacement, or additions to those major components that the association is obligated to maintain. The report shall include, but need not be limited to, reserve calculations made using the formula described in paragraph (4) of subdivision (b) of Section 1365.2.5, and may not assume a rate of return on cash reserves in excess of 2 percent above the rediscount rate published by the Federal Reserve Bank of San Francisco at the time the calculation was made. The summary of the association's reserves disclosed pursuant to paragraph (2) shall not be admissible in evidence to show improper financial management of an association, provided that other relevant and competent evidence of the financial condition of the association is not made inadmissible by this provision. Notwithstanding a contrary provision in the governing documents, a copy of the operating budget shall be annually distributed not less than 30 days nor more than 90 days prior to the beginning of the association's fiscal year. (b) A review of the financial statement of the association shall be prepared in accordance with generally accepted accounting principles by a licensee of the California Board of Accountancy for any fiscal year in which the gross income to the association exceeds seventy-five thousand dollars ($75,000). A copy of the review of the financial statement shall be distributed within 120 days after the close of each fiscal year. (c) In lieu of the distribution of the pro forma operating budget required by subdivision (a), the board of directors may elect to distribute a summary of the pro forma operating budget to all of its members with a written notice that the pro forma operating budget is available at the business office of the association or at another suitable location within the boundaries of the development, and that copies will be provided upon request and at the expense of the association. If any member requests that a copy of the pro forma operating budget required by subdivision (a) be mailed to the member, the association shall provide the copy to the member by first-class United States mail at the expense of the association and delivered within five days. The written notice that is distributed to each of the association members shall be in at least 10-point boldface type on the front page of the summary of the budget. (d) A statement describing the association's policies and practices in enforcing lien rights or other legal remedies for default in payment of its assessments against its members shall be annually delivered to the members not less than 30 days nor more than 90 days immediately preceding the beginning of the association's fiscal year. (e) (1) A summary of the association's property, general liability, earthquake, flood, and fidelity insurance policies, which shall be distributed not less than 30 days nor more than 90 days preceding the beginning of the association's fiscal year, that includes all of the following information about each policy: (A) The name of the insurer. (B) The type of insurance. (C) The policy limits of the insurance. (D) The amount of deductibles, if any. (2) The association shall, as soon as reasonably practicable, notify its members by first-class mail if any of the policies described in paragraph (1) have lapsed, been canceled, and are not immediately renewed, restored, or replaced, or if there is a significant change, such as a reduction in coverage or limits or an increase in the deductible, as to any of those policies. If the association receives any notice of nonrenewal of a policy described in paragraph (1), the association shall immediately notify its members if replacement coverage will not be in effect by the date the existing coverage will lapse. (3) To the extent that any of the information required to be disclosed pursuant to paragraph (1) is specified in the insurance policy declaration page, the association may meet its obligation to disclose that information by making copies of that page and distributing it to all of its members. (4) The summary distributed pursuant to paragraph (1) shall contain, in at least 10-point boldface type, the following statement: "This summary of the association's policies of insurance provides only certain information, as required by subdivision (e) of Section 1365 of the Civil Code, and should not be considered a substitute for the complete policy terms and conditions contained in the actual policies of insurance. Any association member may, upon request and provision of reasonable notice, review the association's insurance policies and, upon request and payment of reasonable duplication charges, obtain copies of those policies. Although the association maintains the policies of insurance specified in this summary, the association's policies of insurance may not cover your property, including personal property or, real property improvements to or around your dwelling, or personal injuries or other losses that occur within or around your dwelling. Even if a loss is covered, you may nevertheless be responsible for paying all or a portion of any deductible that applies. Association members should consult with their individual insurance broker or agent for appropriate additional coverage." SEC. 2. Section 1365.2.5 is added to the Civil Code, to read: 1365.2.5. (a) The disclosures required by this article in regard to an association or a property shall be summarized on the following form: Assessment and Reserve Funding Disclosure Summary (1) The current assessment per unit is $_______ per ____. Note: If assessments vary by the size or type of unit, the assessment applicable to this unit may be found on page ____ of the attached report. (2) Additional assessments that have already been scheduled to be imposed or charged, regardless of the purpose, if they have been approved by the board and/or members: ______________________________________________________________________ ___ : Date assessment is: Amount per unit per : Purpose of the assessment:: : due: : month (If assessments: : : :are variable, see note: : : : immediately below): : : :-------------------:----------------------:-------------------------- --: :-------------------:----------------------:-------------------------- --: :-------------------:----------------------:-------------------------- --: :-------------------:----------------------:-------------------------- --: : : Total: : : ---------------------------------------------------------------------- --- Note: If assessments vary by the size or type of unit, the assessment applicable to this unit may be found on page ____ of the attached report. (3) Based upon the most recent reserve study and other information available to the board of directors, will currently projected reserve account balances be sufficient at the end of each year to meet the association's obligation for repair and/or replacement of major components during the next 30 years? Yes _____ No _____ (4) If the answer to #3 is no, what additional assessments or other contributions to reserves would be necessary to ensure that sufficient reserve funds will be available each year during the next 30 years? ____________________________________________________ : Approximate date assessment : Amount per unit : : will be due: : per month: : : :------------------------------:--------------------: :------------------------------:--------------------: :------------------------------:--------------------: :------------------------------:--------------------: :------------------------------:--------------------: : : Total: : :______________________________:____________________: (5) The following major components, which are included in the reserve study, are NOT included in the existing reserve funding: ____________________________________________________________________ :Major component:: Useful remaining : Reason this major component : : : life in years: : was not included: : :----------------:-------------------:-----------------------------: :----------------:-------------------:-----------------------------: :----------------:-------------------:-----------------------------: :----------------:-------------------:-----------------------------: :________________:___________________:_____________________________: (6) As of the last reserve study or update, the current balance in the reserve fund is $____. Based on the method of calculation in paragraph (4) of subdivision (b) of Section 1365.2.5, the required amount in the reserve fund is $____, and if an alternate, but generally accepted, method of calculation is also used, the required amount is $____. (See attached explanation) NOTE: The financial representations set forth in this summary are based on the best estimates of the preparer at that time. The estimates are subject to change. (b) For the purposes of preparing a summary pursuant to this section: (1) "Estimated remaining useful life" means the time reasonably calculated to remain before a major component will require replacement. (2) "Major component" has the meaning used in Section 1365.5. Components with an estimated remaining useful life of more than 30 years may be included in a study as a capital asset or disregarded from the reserve calculation, so long as the decision is revealed in the reserve study report and reported in the Assessment and Reserve Funding Disclosure Summary. (3) The form set out in subdivision (a) shall accompany each pro forma operating budget or summary thereof that is delivered pursuant to this article. The form may be supplemented or modified to clarify the information delivered, so long as the minimum information set out in subdivision (a) is provided. (4) For the purpose of the report and summary, the amount of reserves needed to be accumulated for a component at a given time shall be computed as the current cost of replacement or repair multiplied by the number of years the component has been in service divided by the useful life of the component. This shall not be construed to require the board to fund reserves in accordance with this calculation. SEC. 3. Section 1365.3 is added to the Civil Code, to read: 1365.3. Unless the governing documents impose more stringent standards, any community service organization as defined in paragraph (3) of subdivision (c) of Section 1368 whose funding from the association or its members exceeds 10 percent of the organization's annual budget shall prepare and distribute to the association a report that meets the requirements of Section 5012 of the Corporations Code, and that describes in detail administrative costs and identifies the payees of those costs in a manner consistent with the provisions of Section 1365.2. If the community service organization does not comply with the standards, the report shall disclose the noncompliance in detail. If a community service organization is responsible for the maintenance of major components for which an association would otherwise be responsible, the community service organization shall supply to the association the information regarding those components that the association would use to complete disclosures and reserve reports required under this article. An association may rely upon information received from a community service organization, and shall provide access to the information pursuant to the provisions of Section 1365.2. SEC. 4. Section 1365.5 of the Civil Code is amended to read: 1365.5. (a) Unless the governing documents impose more stringent standards, the board of directors of the association shall do all of the following: (1) Review a current reconciliation of the association's operating accounts on at least a quarterly basis. (2) Review a current reconciliation of the association's reserve accounts on at least a quarterly basis. (3) Review, on at least a quarterly basis, the current year's actual reserve revenues and expenses compared to the current year's budget. (4) Review the latest account statements prepared by the financial institutions where the association has its operating and reserve accounts. (5) Review an income and expense statement for the association's operating and reserve accounts on at least a quarterly basis. (b) The signatures of at least two persons, who shall be members of the association's board of directors, or one officer who is not a member of the board of directors and a member of the board of directors, shall be required for the withdrawal of moneys from the association's reserve accounts. (c) (1) The board of directors shall not expend funds designated as reserve funds for any purpose other than the repair, restoration, replacement, or maintenance of, or litigation involving the repair, restoration, replacement, or maintenance of, major components which the association is obligated to repair, restore, replace, or maintain and for which the reserve fund was established. (2) However, the board may authorize the temporary transfer of moneys from a reserve fund to the association's general operating fund to meet short-term cashflow requirements or other expenses, if the board has provided notice of the intent to consider the transfer in a notice of meeting, which shall be provided as specified in Section 1363.05. The notice shall include the reasons the transfer is needed, some of the options for repayment,and whether a special assessment may be considered. If the board authorizes the transfer, the board shall issue a written finding, recorded in the board's minutes, explaining the reasons that the transfer is needed, and describing when and how the moneys will be repaid to the reserve fund. The transferred funds shall be restored to the reserve fund within one year of the date of the initial transfer, except that the board may, after giving the same notice required for considering a transfer, and, upon making a finding supported by documentation that a temporary delay would be in the best interests of the common interest development, temporarily delay the restoration. The board shall exercise prudent fiscal management in maintaining the integrity of the reserve account, and shall, if necessary, levy a special assessment to recover the full amount of the expended funds within the time limits required by this section. This special assessment is subject to the limitation imposed by Section 1366. The board may, at its discretion, extend the date the payment on the special assessment is due. Any extension shall not prevent the board from pursuing any legal remedy to enforce the collection of an unpaid special assessment. (d) When the decision is made to use reserve funds or to temporarily transfer moneys from the reserve fund to pay for litigation, the association shall notify the members of the association of that decision in the next available mailing to all members pursuant to Section 5016 of the Corporations Code, and of the availability of an accounting of those expenses. Unless the governing documents impose more stringent standards, the association shall make an accounting of expenses related to the litigation on at least a quarterly basis. The accounting shall be made available for inspection by members of the association at the association's office. (e) At least once every three years, the board of directors shall cause to be conducted a reasonably competent and diligent visual inspection of the accessible areas of the major components which the association is obligated to repair, replace, restore, or maintain as part of a study of the reserve account requirements of the common interest development, if the current replacement value of the major components is equal to or greater than one-half of the gross budget of the association which excludes the association's reserve account for that period. The board shall review this study, or cause it to be reviewed, annually and shall consider and implement necessary adjustments to the board's analysis of the reserve account requirements as a result of that review. The study required by this subdivision shall at a minimum include: (1) Identification of the major components which the association is obligated to repair, replace, restore, or maintain which, as of the date of the study, have a remaining useful life of less than 30 years. (2) Identification of the probable remaining useful life of the components identified in paragraph (1) as of the date of the study. (3) An estimate of the cost of repair, replacement, restoration, or maintenance of the components identified in paragraph (1). (4) An estimate of the total annual contribution necessary to defray the cost to repair, replace, restore, or maintain the components identified in paragraph (1) during and at the end of their useful life, after subtracting total reserve funds as of the date of the study. (f) As used in this section, "reserve accounts" means both of the following: (1) Moneys that the association's board of directors has identified for use to defray the future repair or replacement of, or additions to, those major components which the association is obligated to maintain. (2) The funds received and not yet expended or disposed from either a compensatory damage award or settlement to an association from any person or entity for injuries to property, real or personal, arising from any construction or design defects. These funds shall be separately itemized from funds described in paragraph (1). (g) As used in this section, "reserve account requirements" means the estimated funds which the association's board of directors has determined are required to be available at a specified point in time to repair, replace, or restore those major components which the association is obligated to maintain. (h) This section does not apply to an association that does not have a "common area" as defined in Section 1351. SEC. 5. Section 1368 of the Civil Code is amended to read: 1368. (a) The owner of a separate interest, other than an owner subject to the requirements of Section 11018.6 of the Business and Professions Code, shall, as soon as practicable before transfer of title to the separate interest or execution of a real property sales contract therefor, as defined in Section 2985, provide the following to the prospective purchaser: (1) A copy of the governing documents of the common interest development, including any operating rules, and including a copy of the association's articles of incorporation, or, if not incorporated, a statement in writing from an authorized representative of the association that the association is not incorporated. (2) If there is a restriction in the governing documents limiting the occupancy, residency, or use of a separate interest on the basis of age in a manner different from that provided in Section 51.3, a statement that the restriction is only enforceable to the extent permitted by Section 51.3 and a statement specifying the applicable provisions of Section 51.3. (3) A copy of the most recent documents distributed pursuant to Section 1365. (4) A true statement in writing obtained from an authorized representative of the association as to the amount of the association' s current regular and special assessments and fees, any assessments levied upon the owner's interest in the common interest development that are unpaid on the date of the statement, and any monetary fines or penalties levied upon the owner's interest and unpaid on the date of the statement. The statement obtained from an authorized representative shall also include true information on late charges, interest, and costs of collection which, as of the date of the statement, are or may be made a lien upon the owner's interest in a common interest development pursuant to Section 1367 or 1367.1. (5) A copy or a summary of any notice previously sent to the owner pursuant to subdivision (h) of Section 1363 that sets forth any alleged violation of the governing documents that remains unresolved at the time of the request. The notice shall not be deemed a waiver of the association's right to enforce the governing documents against the owner or the prospective purchaser of the separate interest with respect to any violation. This paragraph shall not be construed to require an association to inspect an owner's separate interest. (6) A copy of the preliminary list of defects provided to each member of the association pursuant to Section 1375, unless the association and the builder subsequently enter into a settlement agreement or otherwise resolve the matter and the association complies with Section 1375.1. Disclosure of the preliminary list of defects pursuant to this paragraph does not waive any privilege attached to the document. The preliminary list of defects shall also include a statement that a final determination as to whether the list of defects is accurate and complete has not been made. (7) A copy of the latest information provided for in Section 1375.1. (8) Any change in the association's current regular and special assessments and fees which have been approved by the association's board of directors, but have not become due and payable as of the date disclosure is provided pursuant to this subdivision. (b) Upon written request, an association shall, within 10 days of the mailing or delivery of the request, provide the owner of a separate interest with a copy of the requested items specified in paragraphs (1) to (8), inclusive, of subdivision (a). The items required to be made available pursuant to this section may be maintained in electronic form and requesting parties shall have the option of receiving them by electronic transmission or machine readable storage media if the association maintains these items in electronic form. The association may charge a reasonable fee for this service based upon the association's actual cost to procure, prepare, and reproduce the requested items. (c) (1) Subject to the provisions of paragraph (2), neither an association nor a community service organization or similar entity may impose or collect any assessment, penalty, or fee in connection with a transfer of title or any other interest except for the following: (A) An amount not to exceed the association's actual costs to change its records. (B) An amount authorized by subdivision (b). (2) The amendments made to this subdivision by the act adding this paragraph do not apply to a community service organization or similar entity that is described in subparagraph (A) or (B): (A) The community service organization or similar entity satisfies both of the following requirements: (i) The community service organization or similar entity was established prior to February 20, 2003. (ii) The community service organization or similar entity exists and operates, in whole or in part, to fund or perform environmental mitigation or to restore or maintain wetlands or native habitat, as required by the state or local government as an express written condition of development. (B) The community service organization or similar entity satisfies all of the following requirements: (i) The community service organization or similar entity is not an organization or entity described in subparagraph (A). (ii) The community service organization or similar entity was established and received a transfer fee prior to January 1, 2004. (iii) On and after January 1, 2006, the community service organization or similar entity offers a purchaser the following payment options for the fee or charge it collects at time of transfer: (I) Paying the fee or charge at the time of transfer. (II) Paying the fee or charge pursuant to an installment payment plan for a period of not less than seven years. If the purchaser elects to pay the fee or charge in installment payments, the community service organization or similar entity may also collect additional amounts that do not exceed the actual costs for billing and financing on the amount owed. If the purchaser sells the separate interest before the end of the installment payment plan period, he or she shall pay the remaining balance prior to transfer. (3) For the purposes of this subdivision, a "community service organization or similar entity" means a nonprofit entity, other than an association, that is organized to provide services to residents of the common interest development or to the public in addition to the residents, to the extent community common areas or facilities are available to the public. A "community service organization or similar entity" does not include an entity that has been organized solely to raise moneys and contribute to other nonprofit organizations that are qualified as tax exempt under Section 501(c) (3) of the Internal Revenue Code and that provide housing or housing assistance. (d) Any person or entity who willfully violates this section is liable to the purchaser of a separate interest that is subject to this section for actual damages occasioned thereby and, in addition, shall pay a civil penalty in an amount not to exceed five hundred dollars ($500). In an action to enforce this liability, the prevailing party shall be awarded reasonable attorneys' fees. (e) Nothing in this section affects the validity of title to real property transferred in violation of this section. (f) In addition to the requirements of this section, an owner transferring title to a separate interest shall comply with applicable requirements of Sections 1133 and 1134. (g) For the purposes of this section, a person who acts as a community association manager is an agent, as defined in Section 2297, of the association. SEC. 6. The provisions of this act shall apply to reports and disclosures made after July 1, 2005.