BILL ANALYSIS SENATE TRANSPORTATION & HOUSING COMMITTEE BILL NO: SB 1128 SENATOR ALAN LOWENTHAL, CHAIRMAN AUTHOR: DeSaulnier VERSION: 2/18/10 Analysis by: Mark Stivers FISCAL: no Hearing date: April 6, 2010 SUBJECT: Common interest developments: transfer fees in the Rossmoor Walnut Creek community DESCRIPTION: This bill allows the Golden Rain Foundation of Walnut Creek to continue to charge transfer fees to the purchasers of units within the common interested developments to which it provides services. ANALYSIS: A common interest development (CID) is a form of real estate where each homeowner has an exclusive interest in a unit or lot and a shared or undivided interest in common area property. Condominiums, planned unit developments, stock cooperatives, community apartments, and many resident-owned mobilehome parks are all CIDs. Each CID is governed by a homeowner association according to the recorded declarations, bylaws, and operating rules of the association. The Davis-Stirling Common Interest Development Act provides the legal framework under which homeowner associations operate in CIDs. Homeowner associations generally fund their activities through monthly assessments on individual homeowners. The assessments cover not only the operating costs of the association, but also maintenance reserves and services that the association provides to its members. Some CIDs have created affiliated entities, called "community service organizations or similar entities" (CSOs), to provide services to residents of the common interest development. The Davis-Stirling Act generally precludes an association or a CSO SB 1128 (DESAULNIER) Page 2 from imposing any assessment, penalty, or fee in connection with a transfer of title for an individual interest except to cover the association's actual costs related to the transfer. The act, however, contains an exemption that grandfathers in CSOs that meet either of the following criteria: The CSO was established prior to February 20, 2003 and exists 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. The CSO was established and received a transfer fee prior to January 1, 2004 and after January 1, 2006 allows a purchaser to pay the transfer fee under an installment plan of at least seven years. The statute defines a CSO as 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. Located in Walnut Creek, Rossmoor is a senior community that is home to over 9,600 seniors. The Golden Rain Foundation of Walnut Creek is a nonprofit corporation designated to serve as trustee under a trust agreement benefiting the seventeen affiliated common interest developments in the Rossmoor community. The purpose of the Foundation is to provide administrative services and to own and maintain major infrastructure and facilities within the developments. Currently, the residents of Rossmoor pay a one-time transfer fee upon moving into the community. The transfer fee is used to pay for infrastructure and facilities costs in lieu of increased assessments or monthly dues on the residents. Since 2004 when the CSO provisions described above took effect, the Golden Rain Foundation of Walnut Creek has considered itself to be a CSO and therefore eligible to continue charging a transfer fee. In 2008, however, in the case of Golden Rain Foundation v. Franz, a case involving whether or not a separate but similar foundation affiliated with Leisure World of Seal Beach was required to make financial documents available to residents, the 4th District Court of Appeal in Southern California opined that the Seal Beach Golden Rain Foundation was an association rather than a CSO for purposes of the Davis SB 1128 (DESAULNIER) Page 3 Stirling Act and therefore required to make financial documents available to residents. Given the similarities between the Seal Beach and Walnut Creek Golden Rain Foundations, the Golden Rain Foundation of Walnut Creek is now concerned that its ability to charge a transfer fee could be challenged. This bill provides that the Golden Rain Foundation of Walnut Creek may continue to charge transfer fees to the purchasers of units within the CIDs to which it provides services if it charged a transfer fee prior to January 1, 2010. COMMENTS: 1.Purpose of the bill . According to the author, by allowing the Golden Rain Foundation of Walnut Creek to continue to charge a one-time transfer fee to residents, this bill will ensure the continuity of services to residents of the Rossmoor Valley. The recent appellate court decision from Southern California raised concerns for the Golden Rain Foundation of Walnut Creek that it would not be found to be a community service organization under current law. If the Foundation is determined to be an association and not a community service organization, it will no longer be able to charge a transfer fee, which will threaten the stability of Rossmoor's infrastructure and facilities funding. The only way to maintain funding and services will be to shift a significant burden onto individual seniors at Rossmoor in the form of increased dues and assessments. 2.An association or a CSO ? The Southern California appellate court decision has thrown into question whether the Golden Rain Foundation of Walnut Creek is a CSO or an association. This bill clarifies the Foundation's ability to continue charging transfer fees without taking sides as to the status of the Foundation with respect to other provisions of the Davis Stirling Act. It defines the Foundation neither as a CSO nor as an association and therefore leaves that decision to the courts. 3.All for one, and one for all . Though legally unrelated, there are three Golden Rain Foundations in California that are all similar in structure: in Walnut Creek, Seal Beach, and Laguna Woods. According to the sponsor, the Seal Beach foundation applies transfer fees similar to those of Walnut Creek, and the Laguna Woods foundation applied such fees early in its life but has not since the mid-1990s. In order to avoid SB 1128 (DESAULNIER) Page 4 revisiting this issue in the future, the committee may wish to consider broadening the bill to cover the Seal Beach foundation which arguably faces the same ambiguity. 4.Working with the Realtors . While it has taken no formal position on the bill, the California Association of Realtors has expressed acceptance of the concept of clarifying the grandfathering of Rossmoor's transfer fees as well as concerns over the uncodified, single-entity manner in which the bill is drafted. The author is working with the Realtors on alternative language to achieve the same result in a different manner and may offer such amendments in committee. 5.Technical amendments . On page 2, line 6, strike "that" and insert "such" On page 2, line 6, strike "development" and insert "developments" On page 2, line 7, strike "2010" and insert "2004" On page 2, line 13 after "property" insert "in the manner" On page 2, lines 13-14, strike "a community service organization" and insert "an entity" POSITIONS: (Communicated to the Committee before noon on Wednesday, March 31, 2010) SUPPORT: Golden Rain Foundation of Walnut Creek (sponsor) Rossmoor Walnut Creek 3 individual residents of Rossmoor Walnut Creek OPPOSED: None received.