BILL ANALYSIS                                                                                                                                                                                                    






           SENATE TRANSPORTATION & HOUSING COMMITTEE       BILL NO: sb 752
          SENATOR MARK DESAULNIER, CHAIRMAN              AUTHOR:  roth
                                                         VERSION: 2/22/13
          Analysis by:  Mark Stivers                     FISCAL:  no
          Hearing date:  April 16, 2013



          SUBJECT:

          Commercial and industrial common interest developments

          DESCRIPTION:

          This bill separates the laws governing commercial and industrial  
          common interest developments (CIDs) from the laws governing  
          residential CIDs and generally makes the operational provisions  
          of current law inapplicable to commercial and industrial CIDs.

          ANALYSIS:

          A CID is a real property development that includes all of the  
          following:  (1) separate ownership of a lot or unit coupled with  
          an undivided interest in common property, (2) covenants,  
          conditions, and restrictions that limit use of both the common  
          area and separate ownership interests, and (3) management of  
          common property and enforcement of restrictions by a community  
          association.  Condominiums, planned unit developments, stock  
          cooperatives, community apartments, and many resident-owned  
          mobilehome parks all fall under the CID umbrella.  While most  
          CIDs are residential, CIDs can also comprise industrial or  
          commercial properties.  

          The Davis-Stirling Common Interest Development Act is the main  
          body of statutory law that governs CIDs in California.  The law  
          includes both foundational provisions that relate to the  
          establishment and definition of the CID property form and  
          operational provisions that regulate the ongoing operation of  
          the managing association.  Current law exempts commercial and  
          industrial CIDs from a few specific provisions of the act but  
          generally treats commercial and industrial CIDs the same as  
          residential CIDs.  

           This bill  separates the laws governing commercial and industrial  
          CIDs from the laws governing residential CIDs and generally  
          makes the operational provisions of current CID law inapplicable  




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          to commercial and industrial CIDs.  Specifically, the bill:

           Makes the Davis-Stirling Act inapplicable to commercial and  
            industrial CIDs and creates a new Commercial and Industrial  
            Common Interest Development Act.
           Carries over the provisions of the Davis-Stirling Act to the  
            Commercial and Industrial Common Interest Development Act  
            except for the following provisions from which the bill  
            exempts commercial and industrial CIDs:

                 Declaration requirements related to location of the  
               property in an airport influence area or in the  
               jurisdiction of the San Francisco Bay Conservation and  
               Development Commission.
                 The requirement that the association allow for at least  
               one type of fire retardant roof covering material that  
               meets legal requirements in a very high fire severity zone.
                 Award of reasonable attorney's fees and costs to the  
               prevailing party in an action to enforce the governing  
               documents.
                 The authority for the association to petition the court  
               for an order reducing the percentage of the affirmative  
               votes necessary for an amendment of the declaration.
                 Provisions regulating changes to the association's  
               operating rules.
                 Owner protections against association policies  
               prohibiting rental of units.
                 The requirement for the association to prepare and  
               disclose a budget.
                 The requirement to conduct association meetings with a  
               recognized parliamentary procedure.
                 Member rights of access to association records.
                 Rules regarding member discipline.
                 The right of owners in a joint association to attend  
               meetings and access records of the joint association.
                 The requirement for the association to provide a  
               document disclosure index.
                 Rules related to campaigns, elections, and open  
               meetings.
                 The requirement that members owning at least 67% of the  
               separate interests approve granting exclusive use of any  
               portion of the common area to an individual owner.  
                 Disclosure requirements relating to the qualifications  
               of association managers and requirements relating to how  
               managers handle association funds.
                 The requirement for the association to adopt a fair,  




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               reasonable, and expeditious procedure for resolving  
               disputes.
                 The requirements that the association provide budgets  
               and insurance coverage information, disclose reserves and  
               reserve deficits, and conduct reserve studies that account  
               for future repair needs. 
                 The requirement for the association annually to disclose  
               its policies and practices in enforcing lien rights or  
               other legal remedies for assessment defaults.
                 Requirements relating to how the board reviews financial  
               statements and makes transfers and payments out of  
               reserves.
                 Limits on assessment increases without a vote of the  
               membership.
                 Limits on late charges and interest charges on  
               delinquent assessments.
                 The prohibition against an association imposing  
               assessments that exceeds the amount necessary to defray  
               costs. 
                 The prohibition on levying assessments based on the  
               taxable value of the separate interests.
                 The right of owners to request dispute resolution and to  
               request a payment plan for delinquent assessments.
                 An owner's right to pay delinquent assessments under  
               protest.  
                 The requirement for the association to credit any  
               payments first towards delinquent assessments and only  
               thereafter to the fees and costs of collection, attorney's  
               fees, late charges, or interest.
                 The requirement for the association to send notices  
               regarding delinquent assessments to a second address  
               provided by an owner.
                 Prohibitions on the use of foreclosure for delinquent  
               assessments that are less than 12 months delinquent and  
               less than $1800, as well as the conditions on the use of  
               foreclosure for greater or older delinquent assessments,  
               including an owner's right of redemption.
                 The requirement for a selling owner to provide a buyer  
               with various association documents and for the association  
               to provide those documents upon request.  
                 The prohibition on the association charging fees in  
               connection with a transfer of title.
                 The requirement that a party engage in alternative  
               dispute resolution before filing an enforcement action in  
               court.
                 Rules relating to association approval of architectural  




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               changes.  

           Allows an association to amend its governing documents without  
            the approval of owners solely to correct any cross-references  
            to the Davis-Stirling Act.
           States that the new act shall not invalidate a document, other  
            than a governing document, or action taken before January 1,  
            2014, if the document or action was proper under the law  
            governing CIDs at the time the document was prepared or the  
            action taken.  
           Updates numerous cross-references to the Davis-Stirling Act in  
            other codes.
          
          COMMENTS:

           1.Purpose of the bill  .  According to the sponsor, the California  
            Law Revision Commission (CLRC), the available legislative  
            history indicates that the Davis-Stirling Act originally was  
            intended to govern only residential property, with no  
            expectation that it would apply to commercial or industrial  
            property.  When it later became apparent that the act also  
            applied to nonresidential developments, AB 2484 (Hauser),  
            Chapter 123, Statutes of 1988, limited that application by  
            generally preserving the foundational provisions of the act  
            (i.e., those that relate to the establishment and definition  
            of the CID property form) while making inapplicable to  
            commercial and industrial CIDs the operational provisions  
            (i.e., those that regulated the ongoing operation of the  
            managing association).  Since then, the Davis-Stirling Act has  
            more than tripled in size, mostly through the addition of  
            numerous new operational provisions.  Many of those provisions  
            appear to have been designed specifically for homeowners.  For  
            the most part, the Legislature does not appear to have  
            considered whether those new provisions were necessary or  
            beneficial to commercial or industrial property owners.

            Based on the same policy of preserving foundational provisions  
            and exempting commercial and industrial CIDs from operational  
            provisions that guided AB 2484, the CLRC completed an analysis  
            of the Davis-Stirling Act and made three general  
            recommendations:

                 The law governing commercial and industrial CIDs should  
               be separated from the law governing residential CIDs.  This  
               will prevent any new laws enacted to benefit residential  
               owners from being inadvertently applied to commercial and  




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               industrial developments.

                 The existing foundational provisions of the  
               Davis-Stirling Act should continue to apply to commercial  
               and industrial CIDs.  These provisions are necessary for  
               any CID, regardless of type.

                 Most of the existing operational provisions of the  
               Davis-Stirling Act should be made inapplicable to  
               commercial and industrial CIDs.  These provisions are not  
               strictly necessary for all CIDs.  They appear to have been  
               added to the Davis-Stirling Act to benefit residential  
               property owners without separate consideration of their  
               effect on commercial or industrial property owners.

            This bill enacts those recommendations.

           1.Following the policy rationale from AB 2484  .  The bill  
            analyses of AB 2484 in 1988 describe the thinking behind  
            exempting commercial and industrial CIDs from the operation  
            provisions of the Davis Stirling Act.  According to the  
            analyses, commercial and industrial CIDs are "business  
            endeavors in which the parties engage the services of  
            attorneys, accountants, management companies, and developers."  
             Unlike owners in residential CIDs, owners in commercial and  
            industrial CIDs are "well-informed" and "governed by other  
            provisions of commercial law."  Provisions that are designed  
            to help homeowners understand the consequences of purchasing a  
            home in a CID are not needed by purchasers of units in  
            commercial or industrial developments.

            Moreover, "the operational needs of commercial and industrial  
            CIDs are different than the needs of residential [CIDs]."   
            Provisions that define the basic property ownership and  
            governance structure for CIDs are needed by commercial and  
            industrial CIDs and do not unduly burden those CIDs.   
            Regulatory requirements designed to protect residential owners  
            are unnecessary and unduly burdensome for business owners in  
            commercial and industrial CIDs, "interfere with commerce, and  
            increase the costs of doing business."  

           2.Substantive amendments to consider  .  The CLRC has done a very  
            thorough review of the provisions that it thinks should apply  
            to commercial and industrial CIDs.  Moreover, the CLRC process  
            allows for significant public participation, and committee  
            staff is not aware of any opposition or concerns that  




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            interested parties have raised in connection to the final  
            product.  Nonetheless, the committee may wish to consider  
            changes in one or more of the following areas: 

            Registration requirement.  Current law requires all CIDs to  
            register with the Secretary of State and pay a $30 fee to do  
            so.  This requirement was put in place to create the  
            infrastructure to support a CID ombudsperson program, which  
            has never been enacted.  To some extent it was also created to  
            inform the Legislature on the number of CIDs in California  
            (the data is unreliable as many CIDs do not register) and to  
            allow for the state to send educational materials to CIDs  
            (which it has not).  As a result, it is not clear what purpose  
            the registration requirement serves.  While the Legislature  
            may ultimately wish to consider repealing the requirement as  
            it applies to all CIDs, at a minimum the committee may wish to  
            exempt commercial and industrial CIDs from this requirement.

            Usury exemption.  Article XV of the California Constitution  
            prohibits usury (i.e., exorbitant interest rates).  The Davis  
            Stirling Act exempts CIDs from these provisions of the  
            Constitution and instead caps interest rates on delinquent  
            assessments and collection costs at an annual interest rate of  
            12%.  This bill exempts commercial and industrial CIDs from  
            the 12% statutory cap on CID interest rates but does not  
            restore the application of the constitutional limits, in  
            effect allowing a commercial or industrial CID to apply any  
            rate of interest it chooses.  The committee may wish to  
            consider restoring the constitutional protections against  
            usury.  

            Pets.  The Davis Stirling Act requires a CID to allow owners  
            to keep at least one pet subject to reasonable rules and  
            regulations.  The CLRC generally has treated property use  
            right provisions of the act as foundational and carried them  
            over to the new act covering commercial and industrial CIDs.   
            Arguably, this provision on pets, however, is only of  
            significance to residential CIDs.  The committee may wish to  
            consider exempting industrial and commercial CIDs from these  
            provisions while grandfathering in any owners in commercial  
            and industrial CIDs who currently have pets.  

           3.Technical amendments  .  
             
                  Delete subdivision (b) from Section 6756 and consolidate  
               the rest of the section.




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                 Restore the provision stating that an owner shall not be  
               liable for any charges, interest, or costs of collection  
               for an assessment payment if it is determined the  
               assessment was paid on time to the association.  Currently,  
               the bill maintains this language only in a required notice,  
               not in actual legal language.

           1.Double Referral  .  The Rules Committee has referred this bill  
            to both this committee and the Judiciary Committee.

          
          POSITIONS:  (Communicated to the committee before noon on  
          Wednesday,                                             April 10,  
          2013.)

               SUPPORT:  California Association of Community Managers 
                         California Business Properties Association
                         Mar West Real Estate

               OPPOSED:  None received.