BILL ANALYSIS
SB 551
Page 1
Date of Hearing: June 14, 2006
ASSEMBLY COMMITTEE ON HOUSING AND COMMUNITY DEVELOPMENT
Gene Mullin, Chair
SB 551 (Lowenthal) - As Amended: May 18, 2006
SENATE VOTE : 23-13
SUBJECT : Common interest development bureau
SUMMARY : Establishes the Office of the Common Interest
Development Bureau as a pilot project within the Department of
Consumer Affairs (DCA) to provide education, dispute resolution,
data collection, and abatement of violations of the law in
common interest developments (CID). Specifically, this bill :
1)Makes legislative findings including the fact that there are
41,000 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.
2)Requires the Bureau 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 a fee may be charged for training materials or
courses that do not exceed the actual cost.
3)Requires that within 60 days of assuming office an association
director or employment as a community manager must file a
certification with the Bureau 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.
4)Requires the Bureau to maintain a toll-free number and an
internet web site.
5)Requires an association to provide its members with annual
written notice of the web site address and toll free number of
the Bureau.
6)Provides any interested party may request that the Bureau
provide assistance in resolving a dispute involving the law
governing CIDs or the governing documents of a CID.
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7)Provides if the Bureau receives a complaint from a CID
homeowner alleging a HOA has violated the law, the Bureau will
do one of the following:
a) refer the complaint to another state or federal agency
if it is within the jurisdiction of that agency;
b) investigate the alleged violation; and/or
c) dismiss the complaint for failure to state a violation
of law.
1)Requires if the Bureau determines after an investigation that
a violation of the law has occurred then it will attempt to
remedy the violation by mutual agreement of the parties.
2)Provides only if a violation cannot be remedied by mutual
agreement of the two parties, the Bureau may serve a written
citation on the HOA, which includes the law that has been
violated, an order to cease the activity, and may include a
maximum $1000 fine depending on the size of the association
and the gravity of the violation, and the procedure for
requesting an administrative hearing on the citation.
3)Requires the HOA must file a request for an administrative
hearing on the citation within 30 days of receipt and requires
DCA to conduct the hearing within 90 days of the request.
4)Requires DCA to appoint a presiding officer qualified as an
administrative law judge, who is not an employee of the
Bureau, to review the citation and administer the hearing.
5)Provides the final decision in an administrative review is
subject to judicial review.
6)Provides an order or fine is enforceable only after it is
upheld in the administrative hearing or if the HOA does not
request a hearing within in 30 days of receiving the citation.
7)Provides if a HOA does not comply with an order or fine, the
Bureau may file an action in superior court to enforce. If
the court determines it is enforceable, the court shall issue
a judgment which has the same force as a judgment in a civil
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action.
8)Requires a HOA to inform the membership each year of any
citations it receives, the nature of the citations, and any
fines levied against the HOA.
9)Requires the Bureau to report annually to the Legislature no
later than October 1 of each year on the following:
a) number of requests for assistance received;
b) how a request either was or was not resolved and staff
time required to resolve the inquiry; and
c) analysis of the most common and serious types of
disputes and any recommendations for statutory reform.
1)Requires the Bureau to submit on or before January 1, 2010,
recommendations to the Legislature on the scope of the office
specifically on the following issues:
a) whether or not the Bureau should have authority to
oversee association elections; and
b) whether or not the provisions requiring a new
association director or managing agent certify they have
read the governing documents should be revised.
1)Allows the Bureau to establish an advisory committee that is
comprised of a fair representation of interests involved in
CIDs.
2)Requires an association to pay a Bureau fee to the Secretary
of State (SOS) every two years in the amount of $10 for each
separate interest within the CID.
3)Provides the biennial fee is not subject to the same approval
requirements for regular assessments of the association.
4)Allows the Bureau to evaluate the biennial fee amount every
two years to determine if it should be adjusted to provide the
necessary revenue for the next two years. Restricts the
biennial fee to no more than $20.
5)Creates the Common Interest Bureau Fund within the SOS in
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which all CID Bureau fee revenue will be placed for the
continuous appropriation of the operation of the Bureau.
6)Requires the Bureau to reimburse the SOS for any costs it
incurs.
7)Provides an association is excused from paying the fee for a
separate interest if another association has already paid the
fee and certified payment through a form to be developed by
the SOS.
8)Provides the Bureau may establish a rule governing which
association should pay the fee if a separate interest is part
of more than one association.
9)Requires the Bureau adopt governing practices and procedures
in accordance with the Administrative Procedures Act.
10) Provides information and advice provided by the Bureau has
no binding legal effect and is not subject to the rulemaking
provisions of the Administrative Procedure Act.
11) Delays the hiring of staff for the Bureau until July 1,
2007.
12) Provides a sunset provision of January 1, 2012.
EXISTING LAW
1)The Davis Stirling Common Interest Development Act provides
the rules and regulations within which homeowner associations
may operate in a common interest development
(Civil Code Section 1350 - 1376).
2)Requires the association to register every two years with the
SOS for a fee and to provide certain information regarding the
organization. Failure to register will result in a suspension
of the association's rights as a corporation and monetary
penalties
(Civil Code Section 1363.6).
3)Prohibits, except for emergency assessments as defined, the
board of directors of an association from imposing a regular
assessment that is more than 20% greater than the regular
assessment for the association's preceding fiscal year [Civil
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Code Section 1366(b)].
FISCAL EFFECT : Unknown
COMMENTS :
Background :
There are over 41,000 CIDs in the state that range in size from
three to 27,000 units. CIDs make up over four million total
housing units which represents approximately one quarter of the
state's housing stock. In the 1990s, over 60% of all residential
construction starts in the state were CIDs. CIDs include
condominiums, community apartment projects, and housing
cooperatives and planned unit developments. They are
characterized by a separate ownership of dwelling space coupled
with an undivided interest in a common property, restricted by
covenants and conditions that limit the use of common area, and
the separate ownership interests and the management of common
property and enforcement of restrictions by a community
association. CIDs are governed by the Davis Stirling Act as
well as the governing documents of the association including
bylaws, declaration, and operating rules. Except when CIDs are
first developed, no state agency provides ongoing oversight to
these communities.
Need for the bill :
CID's are governed by elected volunteer directors. According to
the sponsor, faced with the complexity of CID law, many
volunteer directors make mistakes and violate procedures for
conducting hearings, adopting budgets, establishing reserves,
enforcing rules and restrictions, and collecting assessments.
Many homeowners do not understand CID law and their rights under
the governing documents; as a result, conflicts arise between
the association and homeowners.
The only remedy available to resolve disputes between a
homeowner and an association or between homeowners is private
litigation. This process can be both expensive and lead to
animosity that can degrade the quality of life of a community
and lead to future disputes. In addition homeowners that sue
their association are ultimately suing themselves and their
neighbors as the cost of litigation is borne by the community.
Funded through a $5 fee per unit/per year, the Bureau would
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educate volunteer homeowner board directors and homeowners
through a toll free number, web site, provide training materials
and courses, informal conference, and by citing and fining HOAs
that after investigation are found to have violated state law.
In addition, the Bureau will collect data on the types of
disputes that arise in CIDs and make recommendations to the
Legislature as to needed changes in CID law. Similar programs
are pending in other states including both Arizona and New
Jersey.
Other Jurisdictions :
Several other states, including Florida, Nevada and Hawaii,
provide services to CID associations similar to the ones
proposed in this legislation. Both Florida and Nevada are funded
through an annual fee paid by homeowners and have found
significant public demand for their services. 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 informal dispute resolution.
Nevada has approximately 2,073 CIDs made up of 310,501 separate
interests which represents one-tenth of the 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 enforcement power. Nevada,
Florida, Maryland and Hawaii include an administrative
enforcement authority component in their CID oversight agency.
In Hawaii, the Real Estate Commission provides services to
condominiums including referrals and subsidy for mediation
services, publishes information on their 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.
Bureau Fee:
The proposed CID Bureau would be funded through a yearly $5 fee
for each separate interest collected biennially by the
association and paid to the SOS when an association files its
statement of principal business activity. The fee for the
services of the Bureau breaks down to 42 cents per unit per
month. Of the estimated 41,000 CIDs in the state, approximately
21,000 have registered with the SOS. Although the SOS does not
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currently track the number of units in an association the
average size of a CID is 100 units. At the current level of
compliance, the 2.1 million units that have been registered will
produce approximately $10.5 million annually. If all CIDs comply
with registration the $5 annual fee generated by this pilot
program would produce approximately $20 million per year. The
Bureau has discretion to adjust the fee if the actual cost of
the program is higher or lower every two years. Also the
Legislature may reduce the fee based on reports from the Bureau
and/or audits.
Remedial authority:
SB 551 provides the Bureau the authority to remedy violations of
the law. If the Bureau receives a complaint from a homeowner
about their HOA and determines there has been a violation of
law, it will attempt to resolve the complaint through informal
conference and mutual agreement of the parties; however, if that
is not possible it may issue a citation to the HOA. The author
received feedback both from individual homeowners and
organizations representing seniors in the state that without the
cite-and-fine feature they were concerned the Bureau would not
be effective.
The California Law Revision Commission considered including an
enforcement function in their original proposal to provide state
oversight to CIDs, but did not include it in their final
recommendation. However, according to the author, as SB 551
moved through the Senate there has been a ground-swell of
support for giving the Bureau a cite-and-fine component. The
Bureau would have authority to enforce only state law and not
the associations governing documents. In addition to ordering a
violation of law be corrected, the Bureau could impose punitive
sanctions. The availability of these sanctions could encourage
cooperation in resolving disputes informally and would serve to
deter intentional misconduct. If the HOA and homeowner entered
into a conciliation agreement, a sanction could be avoided which
creates an incentive to cooperate with the Bureau to remedy the
violation. In assessing a fine against a HOA, the Bureau would
consider several different factors, including the size of the
HOA, the gravity of the violation, the presence or absence of
just cause or an excuse, and the history of prior violations.
According to the author, administrative dispute resolution
assistance could resolve many disputes that might otherwise end
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up in court. As a result, the proposed law could significantly
reduce the number of CID cases that are filed in the courts.
Data Collection :
On March 9, 2005, this committee held an informational hearing
to discuss the role of state assistance and/or oversight of
CIDs. Several members of the committee as well as witnesses
discussed the fact that despite many anecdotal reports of
conflicts between homeowners in associations, no agency within
the state collects data on the types or frequency of conflicts
that arise within CIDs. One of the functions of the Bureau will
be to collect data on the volume of assistance requested and the
most common disputes and to make yearly reports to the
Legislature on recommended legislative reform based on this
data. Additionally, the Bureau will provide recommendations on
several specific issues on or before January 1, 2010.
Arguments in opposition :
Opponents representing community managers and volunteer board
members see enforcement as premature and would prefer the Bureau
be limited to education and data collection. They are also
concerned that any enforcement of law will deter members from
volunteering to serve on the HOA board of directors. California
Association of Community Managers (CACM) is concerned that board
members will be prematurely punished before they fully
understand the law through the education the Bureau will
provide. However, the Bureau is required to attempt to resolve a
complaint through conciliation before it can issue a citation.
Consequently, HOAs would only receive a citation and potentially
a fine if they were found to violate the law by the Bureau but
resisted correcting the violation.
The California Alliance for Retired Americans (CARA) is
concerned that CID homeowners will pay for the cost of the
Bureau through the $5 yearly fee collected biennial and reasons
the Bureau should have multiple sources of funding in case the
single source "dries up." The number of CIDs in the state will
not diminish and is only increasing by, as CARA estimates in
their letter, between 1,000 and 1,500 HOAs each year. The $5
fee equates to .42 cents a month and will be paid by homeowners
with potentially substantial equity in their homes -- not
low-income renters. The Bureau could potentially reduce the
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legal expenses of HOAs by heading off disputes before they reach
the courts and creating a body of legal decisions that can be a
guide to other HOAs.
CARA is also concerned that the requirements for establishing a
violation of law are so high that it will be unlikely that the
fines the Bureau can assess will be a viable source of revenue.
The fines that the Bureau can assess are not meant to be a
significant source of income to the Bureau, but rather the fines
are meant as a last resort if the HOA rejects the Bureau's order
to correct a violation of law.
The Department of Finance raised concerns about the initial
start-up costs of the Bureau. Recent amendments to delay the
hiring of staff or opening the office until July 1, 2007 would
serve to address those concerns.
Author's amendment :
The author has agreed to accept the following amendment to
address concerns raised by the California Association of
Realtors.
On page 10, after line 12 insert the following:
"( f ) The Ombudsperson shall not provide any service that
relates to an activity of a licensed real estate professional
that is governed by Part 2 (commencing with Section 11000) of
Division 4 of the Business and Professions Code."
Double referred : The Assembly Committee on Rules referred SB
551 to Housing and Community Development and Business and
Professions Committee. If SB 551 passes this committee, the
bill must be referred to the Assembly Committee on Business and
Professions.
REGISTERED SUPPORT / OPPOSITION :
Support
California Law Revision Commission (CLRC) (Sponsor)
Californian Alliance for Retired Americans (CARA) (support if
amended)
Six CID homeowners (Bakersfield, Rocklin)
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Opposition
California Association of Community Managers (CACM)
Community Association Institute (CAI)
California Building Industry Association
Department of Finance
Executive Council of Homeowners
Irvine Chamber of Commerce
Leisure Village Board of Directors, Camarillo
Seventeen CID homeowners (Campbell, Greenbrae, Irvine, La Mesa,
Lincoln, Loomis, Martinez,
Pasadena, San Francisco, Santa Rosa, Sun City)
Analysis Prepared by : Lisa Engel / H. & C.D. / (916) 319-2085