BILL ANALYSIS
SB 551
Page 1
Date of Hearing: June 29, 2006
ASSEMBLY COMMITTEE ON BUSINESS AND PROFESSIONS
Gloria Negrete McLeod, Chair
SB 551 (Lowenthal) - As Amended: June 19, 2006
SENATE VOTE : 23-13
SUBJECT : Common Interest Development Bureau.
SUMMARY : Establishes the Common Interest Development Bureau
(Bureau) within the Department of Consumer Affairs (DCA) to
provide education, dispute resolution, data collection, and
abatement of violations of the law pertaining to common interest
developments (CID). Specifically, this bill :
1)Establishes the Bureau within DCA.
2)Requires the Director of DCA, as of July 1, 2007, to hire a
Bureau Chief and other staff necessary to carry out the duties
and functions of the Bureau.
3)Requires the Bureau to adopt governing practices and
procedures to implement the provisions of this bill that are
in accordance with the Administrative Procedures Act.
4)Provides that 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.
5)Allows the Bureau to establish an advisory committee that is
comprised of a fair representation of interests involved in
CIDs.
6)Requires the Bureau to report to the Legislature no later than
October 1 of each year on the following information:
a) The number of requests for assistance received;
b) How a request either was or was not resolved and the
staff time required to resolve the inquiry; and,
c) An analysis of the most common and serious types of
disputes and any recommendations for statutory reform.
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7)Requires the Bureau to submit on or before January 1, 2010,
recommendations to the Legislature on the scope of the Bureau
specifically on the following issues:
a) Whether or not the Bureau should have authority to
oversee CID elections; and
b) Whether or not the provisions requiring a new CID
director or managing agent to certify they have read the
governing documents should be revised.
8)Requires a CID 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 (e.g., a CID comprised of 100 units
would pay $1,000 every two years). The Bureau shall increase
or decrease the biennial fee amount every two years to provide
only the revenue that it estimates will be necessary for its
operation and the biennial fee shall not exceed $20.
9)Provides that the biennial fee is not subject to the same
approval requirements for regular assessments of a CID.
10)Provides a CID is excused from paying the fee for a separate
interest if another CID has already paid the fee and certified
payment through a form to be developed by the SOS. The Bureau
may establish a rule governing which CID should pay the fee if
a separate interest is part of more than one CID.
11)Establishes the Fee Account of the Common Interest Bureau
Fund (Fund) and requires all CID Bureau fee revenue to be
placed in the Fee Account and to be used exclusively for the
operation of the Bureau.
12)Establishes the Penalty Account within the Fund and requires
all money paid to the Bureau that is attributable to fines
imposed by the Bureau or cost recovery by the Bureau from
enforcement actions and case settlements to be placed in the
Penalty Account and used exclusively for the operation of the
Bureau.
13)Requires the Bureau to reimburse the SOS from the Fund for
any costs incurred by SOS for implementing the provisions of
this bill.
14)Provides that the Bureau shall sunset on January 1, 2012,
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unless extended.
15)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 a CID owner. Provides
that a fee may be charged for training materials or courses so
long as the fee does not exceed the actual cost of providing
the service.
16)Requires the Bureau to maintain a toll-free number and an
Internet website to provide specified information and
services. Any information provided on the Bureau's website
shall also be available in printed form and the Bureau may
charge a fee for the cost of providing these materials to
anyone who requests them.
17)Requires a CID to provide its members with annual written
notice of the website address and toll free number of the
Bureau.
18)Requires a CID director or managing agent, within 60 days of
assuming office or being employed, to file a certification
with the Bureau that he or she has read the CID 's
declaration, articles of incorporation, and by-laws and,
either the Davis-Stirling Common Interest Development Act, or
a summary of the law.
19)Provides that 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. On
the receipt of a request for assistance, the Bureau shall
investigate the dispute, confer with the parties, and assist
in efforts to resolve the dispute by mutual agreement.
20)Provides that if the Bureau receives a complaint from a CID
homeowner alleging a CID 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; or,
c) Dismiss the complaint for failure to state a violation
of law.
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21)Requires the Bureau to attempt to remedy any violation by
mutual agreement of the parties if the Bureau has determined
that a violation of the law has occurred.
22)Provides that, if a violation cannot be remedied by mutual
agreement of the two parties, the Bureau shall serve the CID
with a written citation that includes the following:
a) A statement of the law that has been violated and the
facts constituting the violation; and,
b) An order to cease the activity that led to the
violation.
23)A written citation from the Bureau may also include an
administrative fine not to exceed $1,000 per violation to be
paid by the CID to the Bureau. The Bureau shall consider the
size of the CID, the gravity of the violation, the presence or
absence of just cause, and any history of prior violations in
determining whether or not to impose a fine and the amount of
that fine.
24)The written citation shall also include a statement of the
procedure and the deadline to request administrative review of
the fine.
25)Requires a CID to 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.
26)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.
27)Provides that the final decision reached after administrative
review is subject to judicial review.
28)Provides that an order or fine is enforceable only after it
is upheld in the administrative hearing or if the CID does not
request a hearing within 30 days of receiving the citation.
29)Provides that if a CID does not comply with an enforceable
order or fine, the Bureau may file an action in superior court
to enforce it. If the court determines the order is
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enforceable, the court shall issue a judgment which shall have
the same force as a judgment in a civil action.
30)Requires a CID to inform the membership each year of any
citations it receives, the nature of the citations, and any
fines levied against the CID.
31)Requires a CID to provide its members with annual written
notice of the website address and toll free number of the
Bureau.
32)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.
EXISTING LAW :
1)Under the Davis Stirling Common Interest Development Act,
provides the rules and regulations within which homeowner
associations may operate in a common interest development.
2)Requires an association to register every two years with the
SOS for a fee and to provide certain information regarding the
association. Failure to register will result in a suspension
of the association's rights as a corporation and monetary
penalties.
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.
FISCAL EFFECT : Unknown
COMMENTS :
Recent proposed amendment . In order to address concerns that
the fee contained in this bill will be too burdensome on
low-income homeowners, the author has proposed the following
amendment that will direct the Bureau to develop a program to
exempt low-income homeowners from the fee:
On page 11, after line 20 insert:
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(f) The Common Interest Development Bureau shall develop a
program that would exempt low-income home owners from the fee.
The income threshold for exemption shall be modeled after the
California Alternate Rates for Energy (CARE) program created
pursuant to PUC Code 739.1.
Background . Based on data aggregated by HOA-Info", 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 areas and
the separate ownership interests and the management of common
property and enforcement of restrictions by a community
association. Except when CIDs are first developed, no state
agency provides ongoing oversight to these communities.
Purpose of this bill . According to the author, the volunteer
directors of CIDs face a difficult task because they "must
operate a nonprofit corporation, manage significant real
property assets, budget for present and future maintenance
needs, and enforce property use restrictions in a fair and
even-handed way - all while complying with a complex body of
regulatory law." The author notes that in such a situation,
mistakes are inevitable and, unfortunately, can lead to costly
and divisive problems; on the other hand, "many CID homeowners
do not fully understand their rights under CID law, and may
mistakenly contest lawful action by an association board." The
author argues that the Bureau will address these problems by
"educating homeowners about the law and by providing practical
advice on managing a CID. Where disputes cannot be avoided, the
Bureau would assist in investigating a complaint, and where
there is a violation, resolve the dispute."
California Law Revision Commission (CLRC) . This bill would
implement a recommendation of CLRC. CLRC was created in 1953 as
the permanent successor to the Code Commission and given
responsibility for the continuing substantive review of
California statutory and decisional law. CLRC studies the law
in order to discover defects and anachronisms and recommends
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legislation to make needed reforms. CLRC has been studying CID
law since 2001, initially focusing on nonjudicial dispute
resolution and dispute avoidance. Prior CLRC recommendations
have been implemented to provide fair procedures for association
rulemaking [AB 512 (Bates), Chapter 557, Statutes of 2003], to
require procedural fairness in architectural review
decision-making (ARD) [AB 2376 (Bates), Chapter 346, Statutes of
2004], and to improve the use of ARD in resolving CID disputes
[AB 1836 (Harman), Chapter 754, Statutes of 2004]. CLRC
develops its recommendations in an open public process where all
interested groups are invited to participate.
CLRC notes that one of the goals of this bill is to avoid costly
private litigation which results under the current system when a
CID dispute cannot be resolved informally. CLRC maintains that
the current situation is problematic because "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."
Sunrise review . This bill, along with AB 770 (Mullin),
underwent "sunrise review" by the Joint Committee on Boards,
Commissions, and Consumer Protection (Joint Committee) in the
fall of 2005. At the time, both this bill and AB 770 created an
Office of the Common Interest Development Ombudsperson; however,
this bill has since been amended to establish a full-fledged
Bureau to deal with problems relating to CIDs. Following an
informational hearing on both this bill and AB 770, the Joint
Committee made the following recommendation: "There is clearly
strong sentiment among some residents who live in Common
Interest Developments for a degree of state involvement to help
resolve their problems. There appears to be some sound policy
reasons for creation of an Ombudsperson." On January 4, 2006,
the Joint Committee voted to support this recommendation, but
did not make a recommendation on the mediation program proposed
to be part of the ombudsperson's office or on the funding
mechanism.
An important focus of the Joint Committee was whether or not the
issues and problems within CIDs justify the creation of an
Office of the Common Interest Development Ombudsperson.
Findings of a nationwide poll conducted by Zogby International
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(sponsored by the Foundation for Community Association Research)
in August 2005 help to shed some light on whether or not the
Office is necessary. The Zogby poll found that 23% of residents
in a CID had filed a complaint about another member of the CID.
Of this 23%, 72% said the complaint had been resolved to their
satisfaction. The analysis of the Joint Committee states that
"these numbers, of course, still leave a significant, though not
large percentage of residents who were not satisfied. Nor is it
clear from this survey how California-specific numbers might
look." The Joint Committee concluded that "there appears to be
room for some state involvement in CIDs that would fall short of
actual involvement in CID disputes."
This bill imposes a new fee on more than 4 million California
homeowners . In order to fund the Bureau provided for in this
bill, a $10 biennial ($5 annual) per unit fee will be assessed
on associations. Based on this bill's estimate of more than 4.3
million dwellings within CIDs, and assuming full compliance with
the law, this bill would generate about $42 million biannually
($21.5 million annually). Although the CID will technically be
paying the fee, this bill explicitly authorizes a CID to pass
this fee onto the homeowners within the CID; see page 11, lines
18 to 20 of this bill: "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."
Enforcement . This bill provides the Bureau with the authority
to remedy violations of law pertaining to CIDs (beginning on
page 13, line 32). This is one of the most controversial
aspects of this bill. This bill lays out a process that the
Bureau would have to follow after receiving a complaint from a
homeowner living in a CID. First, the Bureau would investigate
the complaint to determine whether or not a violation has
occurred. If a violation has occurred, then the Bureau must
attempt to resolve the complaint by mutual agreement of the
parties involved. If the dispute cannot be resolved, the Bureau
has the authority to cite the CID for up to $1,000. Finally,
the alleged violator is granted the ability to appeal a citation
by means of an administrative hearing and then in court.
CLRC considered including an enforcement function in their
original proposal to provide state oversight of CIDs, but did
not include it in their final recommendation. For this reason,
CLRC does not have a position on these provisions of this bill.
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Other interest groups have expressed concern with the Bureau's
enforcement authority, arguing that it is inappropriate to
subject volunteers to potential citations and that this
authority will make homeowners think twice before participating
in the management of their CIDs.
Support . The California Alliance for Retired Americans (CARA)
has a "support if amended" position on this bill. CARA
expresses concerns with the financing for the Bureau and the
relationship of dispute resolution and enforcement within the
Bureau. CARA asserts that the reason the problems arise in CIDs
is not necessarily because volunteer directors are uninformed,
but because the legal structure of CIDs vests all
power-legislative, executive, and judicial-in the CID board.
CARA would like to see this bill amended to clarify the
following: what types of disputes/laws the Bureau would have
jurisdiction over; how jurisdictional issues among other
agencies that provide services affecting CIDs, such as the
Attorney General's Office and Department of Real Estate, would
be resolved; whether or not the Bureau would have jurisdiction
over assessment disputes; what the Bureau's legal tools for
investigating complaints will be (e.g., subpoena powers or
warrants); and, whether or not association attorneys or its
insurance company attorneys would be present at hearings on
complaints to defend the CID (potentially costing the CID more
money).
Opposition . The Executive Council of Homeowners (ECHO) has an
"oppose unless amended" position on this bill. ECHO is
concerned that the enforcement mechanism in this bill will have
a negative impact on individuals' willingness to volunteer on
CID boards: "the threat of substantial citations without first
offering assistance and education will discourage qualified
volunteers from participating in CID boards, resulting in a lack
of leadership and, ironically, increased noncompliance." ECHO
maintains that laws affecting CIDs are very complex and it is
unrealistic to expect that a volunteer will not make inadvertent
mistakes. By adding the threat of penalties, ECHO argues that
many homeowners will decide not to participate. ECHO believes
that the education of directors and owners in CIDs should be the
focus of the Bureau and would support this bill if the
enforcement mechanism were removed.
The California Association of Community Managers (CACM) also has
an "oppose unless amended" position on this bill because of
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concerns with the enforcement mechanism. CACM supported earlier
versions of this bill which established an ombudsperson's office
to focus on education and data collection. CACM feels that
"enforcement is premature" and that "volunteer boards could be
prematurely penalized since they could be operating prior to
learning of the opportunity to request information or assistance
from the Bureau."
The Community Associations Institute (CAI) opposes this bill
contending that there is no documented need for the Bureau, the
fee will be a burden on homeowners, the dispute resolution
services of the Bureau would duplicate services already provided
under existing law, and the enforcement capabilities of the
Bureau will deter homeowners from volunteering to serve on CID
boards. CAI indicates that providing more information and
education to homeowners and volunteer directors would be a
better first step towards resolving issues with CIDs. Finally,
CAI maintains that "the vast majority of owners are content with
their community" and "the premise for the Bureau is based on
comparatively few anecdotal complaints."
The California Secretary of State (SOS) opposes this bill,
citing various difficulties and problems with its role of
collecting the fee prescribed by this bill and then transferring
it to the Bureau. The SOS also argues that implementing this
bill would result in significant costs to the SOS. The SOS
maintains that its database would need to track the number of
dwellings within a given CID in order to calculate the fee owed
by a given CID and that this database (or a separate one) would
also need to track whether or not a dwelling belongs to multiple
CIDs and which CID is responsible for paying the fee on behalf
of that dwelling. Further, the SOS also contends that "payment
of the Bureau fee to the Secretary of State, while being
referred to another agency for information and assistance, could
confuse and aggravate customers."
Related legislation . AB 770 (Mullin), 2005-06 Session, would
create an Ombudsperson's Office within the Department of
Consumer Affairs to deal with Common Interest Developments. AB
770 is pending in the Senate Judiciary Committee.
REGISTERED SUPPORT / OPPOSITION :
Support
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California Law Revision Commission (sponsor)
American Homeowners Resource Center
Over 30 homeowners
Opposition
California Association of Community Managers, Inc.
California Building Industry Association
California Secretary of State
Community Associations Institute
Executive Council of Homeowners (ECHO)
24 homeowners' associations
3 homeowners
Analysis Prepared by : Pablo Garza / B. & P. / (916) 319-3301