BILL ANALYSIS Ó
SENATE TRANSPORTATION & HOUSING COMMITTEE BILL NO: sb 150
SENATOR MARK DESAULNIER, CHAIRMAN AUTHOR: correa
VERSION: 4/25/11
Analysis by: Mark Stivers FISCAL: no
Hearing date: May 3, 2011
SUBJECT:
Common interest developments: rental units
DESCRIPTION:
This bill exempts an owner of a unit in a common interest
development (CID) from any prohibition on renting or leasing the
unit, except when the prohibition was effective on the date of
purchase.
ANALYSIS:
A common-interest development (CID) is a form of real estate in
which 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
all fall under the umbrella of common interest developments.
CIDs are governed by a homeowners' association with an elected
board of directors. The Davis-Stirling Common Interest
Development Act provides the legal framework under which common
interest developments are established and operate. In addition
to the requirements of the act, each CID is governed according
to the recorded declarations, bylaws, and operating rules of the
association. These documents are referred to collectively as
the governing documents of the association.
Some CIDs have restrictions on renting out units. These
restrictions can take various forms, including limiting the
total number of rentals in the development to a set percentage,
requiring a minimum amount of time for leases, prohibiting
rental until a unit has been owner-occupied for at least a year,
and prohibiting renting outright.
This bill exempts an owner of a unit in a CID from any
prohibition on renting or leasing the unit unless the
prohibition was effective on the date of purchase.
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Specifically, the bill:
Provides that an owner of a separate interest in a CID, except
a CID that is limited to industrial or commercial uses, is not
subject to a provision in a governing document that prohibits
the rental or leasing of any of the separate interests unless
the prohibition was effective prior to the date the owner
acquired title.
Allows an owner to consent to be subject to a prohibition on
renting or leasing that took effect after the purchase of his
or her separate interest.
Requires the owner, prior to exercising the exemption allowed
by this bill, to provide the association with verification of
the date of acquisition and the name and contact information
of the prospective tenant.
Requires the seller of a unit in a CID that prohibits the
rental or leasing of the unit to provide a prospective
purchaser with a statement describing the restriction and its
applicability.
COMMENTS:
1.Purpose of the bill . According to the sponsor, current law
does not protect the right of a CID unit owner to rent or
lease his or her unit when such a right existed at the time
ownership commenced. Over the last few years, an increasing
number of CIDs have imposed rental restrictions. Many people
need to rent out their units because of job relocation or a
personal situation. Others made a significant investment
based on the assumption of rental income, only to have the
rules change after the fact. The ability to rent a unit has
become even more important because of the deteriorated housing
market, which makes it difficult to sell. The right to rent
or lease real property is a valuable property right that
should be protected during one's term of ownership. This bill
is intended to ensure that if an owner of a CID unit has the
right to rent that unit at the time he or she purchases it,
that expectation is preserved as long as he or she owns the
unit, irrespective of any subsequent revision of governance
documents effecting the right to rent.
2.Changing the rules . When a person buys into a common interest
development, she or he is expected to abide by the rules of
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the association as set out in the governing documents. If the
potential purchaser does not like the rules, she or he is not
obligated to buy and may choose to invest elsewhere. While it
is important for associations to have the flexibility to
change their rules over time to adapt to changing
circumstances, rule changes are essentially an alteration of
the contract. Moreover, few changes have as drastic an impact
as altering the right to rent out a unit. Such a change can
have dramatic personal and financial implications on owners
and can result in the displacement of existing tenants.
Changing rules after ownership commences raises fundamental
issues of fairness, and it is not clear what circumstances
warrant imposing such drastic impacts when the objective of
prohibiting or restricting rentals can be achieved over time
if applied to new owners.
3.Unproven bias against renters . It is difficult to ascertain
the motives behind restrictions on renting out units in a CID,
but bias against renters seems to be a likely motivation.
While some tenants may not follow rules, the same is true for
homeowners. No evidence has been presented that renters are
any less connected to their home and community or are any more
likely to disobey rules than homeowners. Moreover, when
problems do arise in a rental unit, the association has the
ability to fine the owner of the unit for the violations of
the tenant, and the owner can evict the tenant. This bill
simply seeks to protect the rights of owners from a change in
rules during their ownership, but it raises the question of
what legitimate non-discriminatory basis a CID has for
restricting the rental of property at all.
4.FHA rules . The Federal Housing Administration (FHA) insures
mortgages for certain eligible homebuyers, and the prevalence
of FHA loans in California has fluctuated over time. During
the boom years of the past decade, lenders originated very few
FHA loans in California due to FHA's sale price limit and the
abundance of other equally or more attractive lending
products. In the current lending climate, FHA loans represent
a significant portion of the market because home prices are
now within FHA limits and other loans are hard to find. Under
its current policies, in order to insure a loan for a CID
unit, FHA requires that at least 50 percent of the units in a
CID be owner-occupied or sold to owners who intend to occupy
the units. It is unclear how many CIDs even approach, let
alone exceed, this threshold, and many of those that do exceed
the threshold are probably developments that were approved as
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condos, never sold due to market conditions, and effectively
managed as apartment complexes. Nonetheless, by protecting
the rights of existing owners to rent out CID units, this bill
could cause some CIDs to exceed the FHA threshold, prohibiting
potential buyers from using FHA financing. While it is
unclear how many additional CIDs might cross this threshold
and whether FHA policies will be relevant in California once
the housing market returns to normal, the committee may
nonetheless wish to consider whether the bill should include
some provision giving CIDs the authority to restrict
additional rentals beyond the FHA threshold.
5.Previous legislation . The committee has considered similar
bills in recent years. In 2008, the committee approved AB
2259 (Mullin), which was nearly identical to this bill.
Governor Schwarzenegger vetoed AB 2259 stating, "Property
owners and residents that purchase and live in a CID governed
by an HOA have agreed to live under a common set of rules and
guidelines governed by a democratic process. It is best, as
current law allows, for the owner-members of the HOA to
determine what is best for their communities."
In 2010, the committee approved a much narrower bill, AB 1927
(Knight), which would have required the membership of a CID to
vote on any new restrictions on the rental or lease of a
separate unit, as opposed to current law which, depending on a
CID's own by-laws, allows a CID board to impose such a
restriction without a vote of the general membership.
Governor Schwarzenegger vetoed AB 1927 stating, "There is
insufficient evidence to indicate that rental restrictions are
currently a growing or widespread problem to justify such a
wide-ranging rule change. Furthermore, current provisions in
law provide for an amendment process for ÝCIDs] to make rule
changes."
6.Arguments in opposition . The Community Associations Institute
(CAI) argues that CID rules and regulations, including renter
restrictions, need to be fluid and change with conditions
imposed by the mortgage market or personal needs. In
addition, CAI believes that rental rules should be uniform for
all owners, not differ based on when a unit was purchased.
CAI states, "Renter restrictions are a property right that
periodically should be uniformly changed based on market and
hardship conditions."
7.Double referral . The Senate Rules Committee has referred this
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bill both to this committee and to the Judiciary Committee.
8.Technical amendments .
On page 2, line 2 strike "interest" and insert "interests"
On page 2, line 5 strike ", and" and insert "and that"
On page 3, line 5 strike "not be deemed to" and insert "deemed
to not"
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POSITIONS: (Communicated to the Committee before noon on
Wednesday, April 27,
2011)
SUPPORT: California Association of Realtors (sponsor)
OPPOSED: Community Associations Institute