BILL ANALYSIS SENATE TRANSPORTATION & HOUSING COMMITTEE BILL NO: SB 1128 SENATOR ALAN LOWENTHAL, CHAIRMAN AUTHOR: DeSaulnier VERSION: 4/7/10 Analysis by: Mark Stivers FISCAL: no Hearing date: April 13, 2010 SUBJECT: Common interest developments: transfer fees DESCRIPTION: This bill allows a non-profit entity that provides services to a common interest development under a declaration of trust, if it received transfer fees prior to January 1, 2004, to continue to charge transfer fees to the purchasers of units within the common interested development to which it provides services. The bill also clarifies that such entities are subject to the open records provisions of the Davis-Stirling Act. 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 SB 1128 (DESAULNIER) Page 2 to residents of the common interest development. The Davis-Stirling Act generally precludes an association or a CSO 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, it 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, which the foundation uses 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, the 4th District Court of Appeal in Southern California ruled in the case of Golden Rain Foundation v. Franz, that a similar foundation affiliated with Leisure World of Seal Beach was required to make financial documents available to residents because the Seal Beach Golden SB 1128 (DESAULNIER) Page 3 Rain Foundation was an association rather than a CSO for purposes of the Davis Stirling Act. 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 allows a non-profit entity that provides services to a common interest development under a declaration of trust, if it received transfer fees prior to January 1, 2004, to continue to charge transfer fees to the purchasers of units within the common interested development to which it provides services. The bill also clarifies that such entities are subject to the section of the Davis-Stirling Act requiring associations and CSOs to make association records available to members for inspection and copying. 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 Rossmoor. The recent appellate court decision from Southern California raised concerns for the Golden Rain Foundation of Walnut Creek that a court might not find it to be a community service organization under current law. If the court deemed the foundation to be an association and not a community service organization, the foundation would no longer be able to charge a transfer fee, which would threaten the stability of Rossmoor's infrastructure and facilities funding. The only way to maintain funding and services would 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 whether the foundation is an association or a CSO generally. Just to be safe, the bill clarifies that an entity operating under a declaration of trust to a CID must make its records available to members, regardless of whether a court determines the entity to be an association, a CSO, or something else. 3.All for one and one for all . Though legally unrelated, three SB 1128 (DESAULNIER) Page 4 Golden Rain Foundations exist in California that are all similar in structure: one each 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. Under the terms of the amended bill, all three entities, even Laguna Woods, are allowed to charge transfer fees because they "received" a fee prior to January 1, 2004. POSITIONS: (Communicated to the Committee before noon on Wednesday, April 7, 2010) SUPPORT: Golden Rain Foundation of Walnut Creek (sponsor) Rossmoor Walnut Creek 3 individual residents of Rossmoor Walnut Creek OPPOSED: None received.