BILL ANALYSIS
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|Hearing Date:June 12, 2006 |Bill No:AB |
| |770 |
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SENATE COMMITTEE ON BUSINESS, PROFESSIONS AND ECONOMIC
DEVELOPMENT
Senator Liz Figueroa, Chair
Bill No: AB 770Author:Mullin
As Amended:January 23, 2006 Fiscal: Yes
SUBJECT: Common Interest developments.
SUMMARY: Creates an Ombudsman's Office within the
Department of Consumer Affairs to deal with Common Interest
Developments.
Existing law:
1)The Davis-Stirling Common Interest Development Act sets forth
the rules and regulations under which Home Owner Associations
(HOAs) may operate in a common interest development (CID).
2)Provides that parties to most disputes within a CID should
first resort to informal processes of dispute resolution, and
establishes minimum guidelines to assure such processes in
matters that are headed to litigation are "fair, reasonable
and expeditious." If the dispute does not involve pending
litigation, the parties are not required to use a third party
to help resolve their dispute, but must, at a minimum, meet
and confer with one another. If either an HOA or a homeowner
wishes to file an enforcement action in court, they must first
have tried to engage in some form of alternative dispute
resolution with a third party - though the law does not
require such efforts to be successful, or even to actually
occur.
3)Requires a CID to register every two years with the Secretary
of State (SOS) and to provide certain information regarding
the association. If the CID fails to register, the CID's
rights as a corporation may be suspended and the CID will be
subject to monetary penalties.
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4)Prohibits the board of directors of a CID from imposing a
regular assessment fee that is more than 20% greater than the
regular assessment fee for the CID's preceding year; emergency
assessments, as defined, are excluded from this limitation.
5)Requires secret ballots and other procedural safeguards for
elections in CIDs.
6)Provides some measure of protection to an owner's equity in a
CID home when the owner fails to pay relatively small
assessments to their common interest development associations.
HOAs may not file a foreclosure action to collect delinquent
assessments of less than $1,800 or any assessments that are
more than 12 months delinquent. In such cases, an association
may recover the debt by going to small claims court.
7)Requires, to the extent existing funds are available, that the
Department of Consumer Affairs (DCA) and the Department of
Real Estate (DRE) develop an education website for the boards
of directors of HOAs regarding the role, duties, laws, and
responsibilities of board members and the nonjudicial
foreclosure process.
8)Provides CID homeowners may access financial records and board
minutes, and regulates the way in which boards of directors
may grant exclusive use access to common areas.
This bill:
1)Establishes the Common Interest Development Ombudsman within
the DCA, under the supervision and control of the Director of
DCA (Director).
2)Requires an association, upon its biennial filing of
identifying information with the Secretary of State, to pay a
CID Ombudsman fee. The initial fee shall be equal to $10 each
2 years multiplied by the number of separate interests within
the association.
3)Provides that the Ombudsman shall increase or decrease the
biennial fee amount every 2 years in order to provide only the
revenue that it estimates will be necessary for the operation
of the Office. The biennial fee shall not exceed $20 per
separate interest in an association.
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4)Provides that an association is excused from paying the
biennial fee for a given separate interest if the association
certifies, on a form developed by SOS, that another
association has already paid the biennial fee for the separate
interest. The Ombudsman may adopt rules or regulations to
determine which association shall be responsible for paying a
separate interest fee if that separate interest is part of
more than one association.
5)Provides that the fee shall not be counted towards the
existing provision that an association may not increase
regular assessment fees by more than 20%, thereby making the
fee potentially an additional amount above the 20% cap on fee
increases.
6)Creates the Fee Account of the CID Ombudsman Fund and requires
SOS to transfer fee revenue to this account for the exclusive
purpose of funding the Office.
7)Requires the Ombudsman to offer training materials and courses
to CID directors, officers and owners regarding the operation
of a CID and the rights and duties of an association owner.
Provides that a fee may be charged for training materials or
courses that do not exceed the actual cost.
8)Requires the Ombudsman to maintain a toll-free telephone
number.
9) Requires the Ombudsman to maintain an Internet website with
the following
information:
a) Relevant statutes and regulations pertaining to the
operation of a CID.
b) Information concerning nonjudical resolution of
disputes, including locally available dispute resolution
programs.
c) Description of the services offered by the Ombudsman.
d) Contact information for the Ombudsman.
e) Any changes to laws governing CIDs and any other
information that the Ombudsman deems to be useful to an
association or owner.
10) Requires information provided on the website to also be
available in written form.
Allows the Ombudsman to charge a fee for these materials
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not to exceed their
actual cost of printing and delivery.
11) Requires an association to provide its members with
annual written notice of the
website address and toll free number of the Ombudsman.
12) Provides that any interested party may request the
Ombudsman to provide
assistance in resolving a dispute involving the law
governing CIDs or the governing
documents of a CID.
13) Requires the Ombudsman, after receiving a complaint, to
confer with the interested
parties and attempt to resolve the dispute through mutual
agreement. Provides that
the Ombudsman may offer to mediate a dispute if it cannot
first be resolved through
informal conference, and to establish a mediation program
or to contract for
mediation services.
14) Provides the Ombudsman may adopt a fee of not more than
$50 for mediation
services or may contract with private parties to provide
mediation services.
15) Requires that within 60 days of assuming office an
association director must file a
certification with the Ombudsman that they have read each
of the following: the
declaration, articles of incorporation, by-laws of the
association and either the
Davis-Stirling Common Interest Development Act or a
summary of the law.
16) Requires a person who is providing or proposes to provide
the services of a CID
manager to disclose to the board of directors in writing,
on an annual basis, that
they have read the governing document of the association.
17) Requires the Ombudsman to report no later than October 1,
annually to the
Legislature on the following:
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a) The number of requests for assistance received.
b) How a request was or was not resolved and the staff time
required to resolve the inquiry.
c) The most common and serious types of disputes.
d) Any recommendations for statutory reform.
18) Requires the Ombudsman to submit, on or before January 1,
2010, recommendations to the Legislature on the scope of
the Ombudsman's Office and the following issues:
a) Whether or not the Ombudsman should be
authorized to enforce CID law.
b) Whether or not the Ombudsman should have
authority to oversee association elections.
c) Whether or not the provisions requiring a new
association director or managing agent to certify they
have read the governing documents should be revised.
19) Allows the Ombudsman to establish an advisory committee
that is comprised of a
fair representation of interests involved in CIDs.
20) Provides that the Ombudsman shall adopt rules and
regulations governing the
duties of the Office in accordance with the Administrative
Procedures Act.
21) Provides that information and advice provided by the
Ombudsman has no binding
legal effect and is not subject to the rulemaking
provisions of the Administrative
Procedure Act.
22) Provides that the Ombudsman's Office shall sunset on
January 1, 2012 unless another statute is enacted to delete or
extend that date.
23) Makes legislative findings including the fact that there
are 36,000 CIDs in the state,
the complexities that volunteer director's face in
managing and complying with
existing laws, and the adversarial nature of private
litigation which is the
mechanism under existing law to enforce CID law.
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FISCAL EFFECT: The bill has been keyed fiscal. The
proposal would be financed through an assessment on each
CID, based on the number of units/homeowners, as well as
fees for some particular services (such as mediation) and
the actual cost of some written materials.
COMMENTS:
1.Purpose. This bill reflects recommendations from the
California Law Revision Commission (CLRC) to address
problems within CIDs. This bill is nearly identical to a
bill which passed our of this Committee, SB 551
(Lowenthal), on January 9, 2006, by a vote of 4-1. Since
moving out of this committee, SB 551 has been amended
significantly, but still deals with the same subject
matter. In light of those amendments, SB 551 will need
to return to this Committee if it passes the Assembly in
its current form. The two Authors have been in contact
on their bills, but have pursued them independently. As
with SB 551, this Committee will continue to follow AB
770 to determine if any subsequent amendments would
require further by this Committee.
2.Background.
a) What are CIDS? CIDs consist of groups of
homeowners who also jointly own a common interest in
parts of the property. CIDs include condominiums,
community apartment projects, housing cooperatives and
planned unit developments. They are characterized by
a separate ownership of individual dwelling space
coupled with an undivided interest in property common
to all owners. An "undivided interest" means that no
owner has a "share" of the common property, but rather
all own it together without there being any individual
portions or areas. Unlike their ownership of their
own dwelling space, no owner can individually decide
to do anything they want with the common property.
The common property may be hallways and lobby areas
(in condominiums, for example), swimming pools,
parkways, streets, or virtually anything else.
b) How many CIDs are there? Both the CLRC and the
Public Policy Institute of California (PPIC) have
studied the emerging issues related to CIDs in
California. There is little doubt that CIDs are now
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an established and growing part of California's social
fabric. According to data gathered by Levy & Company,
a CPA firm that provides services to HOA's, there are
over 41,000 CIDs in the state that range in size from
three to 27,000 units. CIDs make up over 4.3 million
total housing units in California alone, and they
represent approximately one quarter of the state's
housing stock. More significantly, PPIC points out
that in the 1990s, over 60% of all new residential
construction starts in the state were CIDs. This very
strongly suggests that any problems currently existing
with CIDs will grow at a high rate in the years to
come.
c) What are CC&Rs? All owners in a CID must agree to
abide by a set of Covenants, Conditions and
Restrictions (CC&Rs) that limit not only the use of
the common area, but even certain aspects of the
separate ownership interests of each individual. For
example, CC&Rs may regulate the color that homes may
be painted, whether owners may have pets, or what kind
of trees may be planted on a homeowner's individual
property. The California Supreme Court has clearly
ruled that the CC&Rs are presumed to be reasonable and
are thus enforceable in virtually all but the most
exceptional cases. Consequently, the terms of the
CC&Rs are extremely important for every homeowner to
read and understand.
d) What is an HOA? The common management of CIDs is
the responsibility of a Home Owners Association (HOA),
run by an elected board of directors who must be
owners in the CID. Among their powers is the ability
to enforce and interpret the terms of the CC&Rs, to
levy assessments on the owners, and to create new
rules on behalf of the homeowners. In this sense,
then, HOAs exercise a form of governmental authority
within a CID - and are, in effect, all three branches
of the "government:" executive, legislative and
judicial. All those who buy into a CID are required
to receive a brief overview of CID ownership. The
following statutorily mandated language from that
disclosure sums up the rights and responsibilities of
CID ownership:
"When contemplating the purchase of a dwelling in a
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common interest development, you should consider
factors beyond the attractiveness of the dwelling
units themselves. Study the governing instruments and
give careful thought to whether you will be able to
exist happily in an atmosphere of cooperative living
where the interests of the group must be taken into
account as well as the interests of the individual.
Remember that managing a common interest development
is very much like governing a small community . . .
the management can serve you well, but you will have
to work for its success."
Many CIDs contract with outside management companies to
advise them on proper management techniques and
procedures. The management companies may not,
themselves, make decisions, which are the sole
responsibility of the elected Board. However, like
accountants or lawyers, these professionals may have
access to information and networks that can help them
in their decision-making process.
e) What is the State's involvement with CIDs? Except
when CIDs are first developed, no state agency
provides ongoing oversight to these communities.
During initial construction, when the first owners are
moving in, the DRE oversees the beginning stages of
the HOA, particularly focusing on the governing
documents, such as the CC&Rs. When the final
homeowners have moved in, DRE involvement ends, and
the HOA is fully in charge of all governance.
Homeowners, all of whom have a direct economic and
social stake in the HOA, must then agree among
themselves on all matters relating to the current and
future status of their HOA.
f) What do other states do about CIDs? Other states,
including Florida, Nevada and Hawaii, provide services
to CID associations similar to the ones being proposed
for California. Therefore, their experience can be
helpful as California decides how to proceed. Both
Florida and Nevada assess an annual fee paid on
homeowners and have found significant public demand
for the services of programs regulating CIDs. In
1997, the Nevada Legislature created the Office of the
Ombudsman for Owners in Common Interest Communities to
provide services to CIDs, including education and
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informal dispute resolution.
Nevada has approximately 2,073 CIDs made up of 310,501
separate interests, which represents less than
one-tenth the number of CIDs in California. The Nevada
Ombudsman charges a $3 annual fee per separate
interest and employs 13 full-time staff. In 2003, the
Nevada program was expanded to include the power to
enforce the laws.
In Hawaii, the Real Estate Commission provides services
to condominiums, including referrals and subsidies for
mediation services, publishes information on its
website and in print, and responds to specific
inquires. The Hawaii program is funded by a $4 per
unit biennial fee charged to registered condominiums.
Hawaii has 135,000 condominiums and in 2004 received
22,000 requests for information or advice. If the
experience of Hawaii is extrapolated to California,
the Ombudsman could expect to receive 488,000 requests
for assistance.
3.Sunrise Review of CID Proposals. The proposals in this
bill and in SB 551 (Lowenthal), were reviewed by the
Joint Committee on Boards, Commissions and Consumer
Protection, which held a full hearing in November, 2005.
By statute, any proposal to create a new regulatory board
or commission in state government undergoes Sunrise
Review, the statutory counterpart to the Joint
Committee's Sunset Review, which provides ongoing review
of existing regulatory boards and commissions to
determine whether they are accomplishing the goals the
legislature established for them.
On January 4, 2006, the Joint Committee voted to support
creation of the Ombudsman, though its recommendations
were not entirely consistent with the current proposal.
Specifically, the Joint Committee recommended that:
a) There appears to be sound public policy reasons to
create an Ombudsman to deal with CIDs;
b) It is currently not clear whether there is adequate
need or demand for a state-run mediation program
specific to CIDs;
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c) It would make no recommendation on how the
Ombudsman should be funded.
4.Arguments in Support. CLRC argues that the Ombudsman is
necessary in order to provide a centralized place to
disseminate consistent and correct information about
CIDs, as well as to collect information about CIDs, and
perhaps, to provide for mediation. Mistakes and
misunderstandings are not uncommon in the CID context:
"CIDs are governed by volunteer directors, elected from
among the unit owners. Faced with the complexity of CID
law, many of these volunteers make mistakes and violate
procedures for conducting hearings, adopting budgets,
establishing reserves, enforcing rules and restrictions,
and collecting assessments. Many CID homeowners do not
understand their rights under CID law and under their
association's governing documents. These sorts of
mistakes and misunderstandings inevitably lead to
conflicts within the development, either between the
association and an individual homeowner, or between
homeowners."
Because CIDs are made up of people's homes, there is no way
to escape problems that develop in these communities.
Disputants must come into regular and often unavoidable
contact with one another. Consequently, small disputes
that are not resolved can fester, and escalate into
larger issues. While resolution in other contexts could
be found in the courts, this is problematic in the CID
context, according to CLRC:
"A homeowner who believes that a community association is
violating the law or has otherwise breached its duties
has no effective remedy other than civil litigation.
Litigation is not an ideal remedy for many common
interest development disputes. Homeowners who sue their
associations are suing their neighbors and themselves.
The adversarial nature of litigation creates animosity
that can degrade the quality of life within the community
and make future disputes more likely to arise. Litigation
imposes costs on the community as a whole - costs that
must be paid by all members through increased
assessments."
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The California Association of Community Mangers (CACM)
strongly feels that gathering empirical data about HOAs
is the most critical aspect of this bill, since in this
group's experience, misunderstandings about governing
documents comprises the largest percentage of complaints
against HOA management. CACM also notes that the
educational provisions of the bill would assist in giving
directors, officers and owners a working knowledge of the
laws governing HOAs.
The California Alliance of Retired Americans (CARA) supports
the concept of the bill (creation of an Ombudsman), but has
serious concerns about several specific elements. CARA has
serious reservations about the bill's financing. California
has two other Ombudsman's offices, one for nursing homes and
one for mobile home parks. Neither is supported by a fee on
consumers. Moreover, CARA argues, it is not at all clear what
the office's budget would be, or what specific services it
would provide.
CARA also points out that there may be some duplication or
overlap of services when it comes to dispute resolution.
Current law provides for HOAs to establish a fair, reasonable
and expeditious dispute resolution mechanism, and if they do
not then the statute provides a default procedure. Current
law also provides for a specific alternative dispute
resolution process when an enforcement action is pending in
the courts. CARA argues that the current bill is not clear in
how the mediation provisions of the current bill interact with
existing law, and could duplicate some of those provisions.
Finally, CARA notes that the bill does not include enforcement
within the Ombudsman's duties. In this, the CID ombudsman
would differ from the state's other two consumer Ombudsman
offices. This bill requires the office, if established, to
report back to the Legislature on whether enforcement would be
appropriate. CARA believes that the Ombudsman without
enforcement power can do little to protect consumer victims.
5.Arguments in Opposition. The Secretary of State (SOS)
opposes the bill for several reasons. First, the bill
would require additional staff to handle the anticipated
increase in workload. Second, having multiple agencies
deal with multiple functions may very well confuse the
public. Assessments would be payable to the SOS, but the
office's functions would be performed by the Ombudsman.
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This could cause aggravation. Finally, the SOS argues
that its database system would have to be revamped to
capture the number of separate interests in order to
properly calculate the proper fees.
The Stop Hidden Taxes Coalition opposes the bill, labeling
the fee on homeowners as a "tax."
In addition, some individuals have expressed personal
opposition to the Committee on this bill and its Senate
version. Some have made an argument similar to
Cal-Tax's. Homeowners who want to pay for the services
the bill would establish may choose to do that through
their own HOA, and should not have the state imposing
such fees on them against their will. While not
disputing the potential good the Ombudsman could do, they
object that it might not be worth the cost to homeowners.
The fee that would be imposed on CIDs on a per-unit
basis is viewed by opponents as not commensurate with the
value they would or might receive from the Ombudsman.
Many of the services, such as providing information or
mediation, are readily available, and utilized by
homeowners when needed. Most CIDs already impose regular
fees and assessments on owners, and this state-mandated
fee, while minimal, would be an additional burden.
6.PROPOSED AMENDMENTS: The Author's office has proposed
the following amendments to this bill:
a) Updated information suggests that the current
number of HOAs in the bill is too low. The Author
would like to change the reference to "36,000" HOAs to
"41,000" and change "3,000,000" dwellings to
"4,300,000" based on information provided by Levy &
Company CPAs.
b) In response to cost concerns expressed by the SOS,
the Author wants to clarify that "Costs incurred by
the Secretary of State pursuant to this section shall
be reimbursed from the Common Interest Development
Ombudsperson Fund."
c) The Author is considering making changes to the
bill's mediation provisions.
Since the most substantive changes involve issues that
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would be of greatest concern to the Senate Judiciary
Committee, these proposed amendments should be addressed
within the Judiciary Committee if this bill is passed out
of this Committee.
7.Policy Issue: Costs of the Ombudsman Program. The bill
would primarily be financed by a $10 biennial fee,
assessed on homeowners in HOAs. This was originally
calculated based on figures from other states with
programs similar to the one proposed here. However, two
separate issues have arisen which could affect the budget
on both mediation and structure.
The current bill includes a cap of $50 on mediation. When
the bill moves to the Judiciary Committee, the amendments
there will bring this figure to the fore. If it is a cap
on what homeowners should pay, it may be unrealistic in
light of what mediation's real costs are. If the
Ombudsman is to subsidize mediation costs, this could
have a significant affect on the budget of the office.
If the Ombudsman is to run its own mediation programs,
this, too, could lead to costs that are not fully taken
into account. Limits on mediation, for example, on the
kinds of cases that would fall within the bill's
mediation provisions, such as a requirement that the bill
only deals with disputes between a homeowner and the
association; or time limits on the mediation within the
bill's ambit, such as a four-hour cap would help to keep
the office's budget within limits.
In addition, the bill envisions an informal structure that
has no regulatory authority. This can keep costs low.
However, any proposal that would involve a more formal
structure, such as a bureau or a board, would require
increased costs to deal with legal staff, public
transparency, personnel costs, etc.
NOTE : Double-referral to Senate Judiciary Committee.
SUPPORT AND OPPOSITION:
Support:
California Law Revision Commission (Sponsor)
California Association of Community Managers
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Executive Council of Homeowners
California Alliance for Consumer Protection
AFSCME
Support if Amended:
California Alliance of Retired Americans
Opposition:
Secretary of State
Stop Hidden Taxes Coalition
Various individuals
Consultant: David Link