BILL ANALYSIS Ó 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 SB 752 (ROTH) Page 2 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, SB 752 (ROTH) Page 3 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 SB 752 (ROTH) Page 4 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 SB 752 (ROTH) Page 5 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 SB 752 (ROTH) Page 6 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. SB 752 (ROTH) Page 7 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.