SB 551 Senate Bill - Bill Analysis

BILL ANALYSIS

SENATE TRANSPORTATION & HOUSING COMMITTEE BILL NO: SB 551
SENATOR TOM TORLAKSON, CHAIRMAN
AUTHOR: Lowenthal
VERSION: 3/29/05
Analysis by: Mark Stivers FISCAL: Yes

SUBJECT:

Common interest development ombudsperson pilot project.

DESCRIPTION:

This bill would establish an Office of the Common Interest
Development Ombudsperson within the Department of Consumer
Affairs to provide education to both homeowners and association
officers and to provide mediation of disputes.

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
all fall under the umbrella of common interest developments.
The Davis-Stirling Common Interest Development Act provides the
legal framework under which homeowner associations operate in
common interest developments. In addition to the requirements
of the Act, each CID is governed by a homeowner association
according to the recorded declarations, bylaws, and operating
rules of the association.

Except at the initial stage of development, there is no state
oversight of CIDs. State laws and the governing documents of an
association can only be enforced through the courts. Given the
length and expense of litigation and the inability of parties to
obtain legal counsel in the absence of large monetary damages,
resolving disputes through the courts is not an option in many
cases.

SB 551 (LOWENTHAL) Page 2

Establish the Office of the Common Interest Development
Ombudsperson within the Department of Consumer Affairs and
authorize the director to employ persons as necessary to
discharge the obligations of the office.
Require the ombudsperson to:
? Maintain a toll free number to provide information and
assistance.
? Offer training materials and courses to board members
and homeowners.
? Provide information on the internet and by mail on CID
laws, dispute resolution, contacting dispute resolution
organizations, the services provided by the ombudsperson,
and recent legislative changes to CID laws.
? Attempt to resolve disputes through informal conference
upon request and within the limits of available resources.
Authorize the ombudsperson to offer mediation and charge a fee
up to $25 for this service.
Require the ombudsperson to adopt rules governing the
practices and procedures of the office pursuant to the
Administrative Procedures Act.
Authorize the ombudsperson to establish an advisory committee.
Provide that information and advice provided by the
ombudsperson has no binding legal effect.
Exempt the state from any liability for providing or failing
to provide information or advice through the office.
Require the ombudsperson to report annually to the Legislature
on workload and the most common and serious types of questions
or disputes.
Require the ombudsperson to submit recommendations by January
1, 2009 regarding the scope of the office and specifically
whether or not the ombudsperson should be authorized to
oversee CID elections and/or enforce CID law.
Assess a $10 biennial fee per unit on each CID association in
order to fund the program and authorize the ombudsperson to
raise or lower the fee every two years to provide the
estimated revenue needed to operate the office for the next
two years, provided that the fee does not exceed $20 per unit.
Continuously appropriate the fee revenue to the ombudsperson
for administration of the office.
Sunset the office on January 1, 2011.

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Require an incoming association director or managing agent to
certify to the ombudsperson that she has read the governing
documents of the association and the Davis-Stirling Act.

COMMENTS:

1. Purpose of the bill . According to the sponsor,
volunteer CID directors face a difficult task. They must
operate a nonprofit corporation, manage significant real
property assets, budget for present and future maintenance
needs, and enforce property restrictions in a fair and
even-handed way - all while complying with a complex body
of regulatory law. Mistakes are inevitable and can lead to
costly and divisive problems. In addition, may CID
homeowners do not fully understand their rights under CID
law, and may mistakenly contest lawful action by an
association board. This bill would help to avoid CID
disputes by educating homeowners and providing practical
advice on managing a CID. Where disputes cannot be
avoided, the ombudsperson would assist in trying to resolve
the problem informally, without resort to costly and
adversarial litigation.

2. A significant and growing industry . There are over
36,000 CIDs in California containing a total of more than 3
million housing units, fully a quarter of the state's
housing stock. This figure is growing rapidly as roughly
60% of all new housing construction is contained within a
CID. Yet when questions or disputes arise, there is no
place for homeowners or board members to turn for
assistance other than attorneys or trade associations.
Experience from other states shows that there is
significant public demand for education and mediation
services. Given the number and growth rate of CIDs in
California, there will undoubtedly be a great demand for
the services of an ombudsperson.

3. A significant new state entity . Nevada's ombudsman
program employs 13 full time employees while covering only
one-tenth as many CID units as California. If one
extrapolates based on the size difference, California's
ombudsperson program would need as many as 130 employees at
a cost of roughly $13 million. Given the 3 million CID
units in California and the $5 per year fee per unit, the
fees imposed by this bill would generate roughly $15
million per year if the collection rate were to reach 100%.

SB 551 (LOWENTHAL) Page 4

The ombudsperson would have the authority to raise or
lower fees to meet anticipated costs. Such an entity would
be only somewhat smaller than the Department of Fair
Employment and Housing.

4. No enforcement authority . At least three other states
and one county in Maryland have established CID office of
some sort. All but one of these entities also authorizes
the office to conduct certain enforcement actions against
an association that violates state law. Nevada provides an
interesting case study. Initially, the state's role was
limited to education and enforcement, similar to this bill.
Within a few years, it became clear that enforcement
authority was needed to effectively deal with disputes in
common interest communities, and the state's role was
expanded. Without the ability to adjudicate and remedy
violations of law, the ability to resolve disputes is
limited.

The California Law Revision Commission's initial
recommendation suggested giving the state the authority to
enforce violations of state law. At a recent hearing of
the Assembly Housing and Community Development Committee on
the proposal, however, various stakeholders and members of
the committee expressed concerns about this role. As a
result, the Law Revision Commission has reworked its
proposal to focus on education and mediation for now.
Under the bill, the ombudsman would report to the
Legislature in 2009 on whether the office should be
authorized to enforce CID law.

5. Reading certification necessary ? One provision of the
bill requires an incoming association director or managing
agent to certify to the ombudsperson that she or he has
read the governing documents of the association and the
Davis-Stirling Act. The apparent intent is to ensure that
board members and professional managers are familiar with
these important documents. While this is a laudable goal,
the certification requirement may be overly intrusive.
Moreover, it is not clear that affected persons would take
the requirement seriously or that the ombudsperson would or
could do anything in the event this requirement was
ignored. The committee may wish to consider whether this
requirement is necessary.

6. Double referral . The Senate Rules Committee has

SB 551 (LOWENTHAL) Page 5

referred this bill to both the Transportation and Housing
Committee and the Judiciary Committee. If the committee is
inclined to approve this bill, the motion should be do pass
and re-refer to the Judiciary Committee.

7. Technical amendment . On page 7, strike lines 15-16 and
insert "(e) An assessment increase necessary to recover the
fee imposed by this section shall not be included in any
calculation for purposes of subdivision (b) of Section
1366."

RELATED LEGISLATION

AB 770 (Mullin) is currently a spot bill but will be amended
soon to include language identical to this measure.

POSITIONS: (Communicated to the Committee before noon on
Wednesday,
March 30, 2005.)

SUPPORT: California Law Revision Commission (sponsor)

OPPOSED: None received.