BILL ANALYSIS
SENATE HOUSING & COMMUNITY DEVELOPMENT COMMITTEE
Senator Denise Moreno Ducheny, Chair
Bill No: AB 2718Hearing:June
21, 2004
Author: LairdFiscal:No
Version: As proposed to be
amended Consultant:Michelle
Rubalcava
COMMON INTEREST DEVELOPMENTS AND ASSESSMENTS
Background and Existing Law :
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, and community apartments 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.
Homeowner associations fund their activities through
monthly assessments on individual homeowners. The
assessments cover not only the operating costs of the
association, but also maintenance reserves and services
that the association provides to its members.
In some instances, the original developer or the
association has also created a community service
organization (CSO), which is generally a legally
independent non-profit organization affiliated with the
association or the development. At some associations a
community service organization funds a variety of services
for residents.
The Davis-Stirling Act requires that associations provide
homeowners with an operating budget which includes
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estimated revenues and expenses, and a summary of reserves
that are available to repair, replace or maintain the major
components of the development.
The summary of reserves should include:
1. The current estimate of the amount of cash reserves
necessary to repair, replace, restore, or maintain the
major components of the development.
2. The current amount of accumulated cash reserves
actually set aside.
3. If applicable, the amount of funds received from
either a compensatory damage award of settlement.
4. The percentage of expected costs that will be
covered by reserves.
5. A statement whether the association board
anticipates the need to levy a special assessment to
cover costs in excess of available reserves.
In order to encourage the board to be honest with its
members, the summary of the association's reserves is not
admissible in evidence to show improper financial
management of an association.
Proposed Law :
Assembly Bill 2718 would require homeowner associations to
provide homeowners with an Assessment and Reserve Funding
Disclosure Summary statement or something substantially
similar as part of the reserve study that is provided to
homeowners every three years. This summary statement shall
include:
The current assessment.
Assessments that have been levied by the board but which
have not taken effect.
Assessments that would be required, as determined by the
reserve study required under existing law, to replace
roofs and other assets which are the responsibility of
the association.
This bill would also:
Require the summary to be included with each disclosure
regarding association accounts.
Require that the review of the financial statement of the
association to be prepared using a simplified reserve
fund of calculation.
Require an association to distribute an operating budget
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and revisions to the policies governing legal remedies
for default for unpaid assessments no less than 30 days
and no more than 90 days prior to the beginning of the
associations' fiscal year.
Provide the association may charge only for the "actual"
cost of reproducing association documents during transfer
of title.
Require the association to use the services of a general
contractor or other qualified person for purposes of
determining the estimated cost or remaining useful life
of a component when it has reached one half of its useful
life for the reserve study.
Define a "qualified person" as a natural person or entity
that is licensed as a general contractor or other
business or profession that would allow the person to
design, install, construct, repair, restore or replace a
major component.
Require the association, if it is made aware of
deterioration that makes the previous estimates
unreliable, to obtain a new estimate of the useful life
and costs from a qualified person.
For those associations with a community service
organization (CSO) that perform some of the functions of an
association, Assembly Bill 2718 would require a financial
statement so that the association could prepare the
summary.
Comments :
1. Purpose of bill. Common interest developments are
required to provide their members with financial
information in the form of a reserve study, which assesses
the major components of a development for potential repairs
or replacement and the funds necessary to replenish the
reserve accounts maintained by the association. According
to the author, reserve studies are numerically complex and
not user-friendly for homeowners. This bill requires
homeowner associations to provide their members a
user-friendly summary statement which will clarify current
and future assessments, the current amount of reserve funds
and future assessments that would be required for repairs
and replacements that are the financial responsibility of
the homeowners association.
Working with the California Association of Realtors and the
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consulting firms which prepare the reserves studies for
homeowners association, the author has created a summary
document which is designed to simplify the financial
expectations of association membership for current members
as well as incoming members. According to the author, a
common problem real estate agent's encounter when selling a
CID home is lack of information regarding the future
assessments new members will encounter once they are in the
association. The intent of this bill is to clarify future
assessments for the buyer and association members.
According to the California Research Bureau, insurance
providers report between 14 and 20 percent of lawsuits
against Board of Directors are for financial mismanagement
and of these the number one issue is lack of reserve funds.
The California Department of Real Estate reports, real
estate agents cite litigation as the number one threat to
future viability and market competitiveness of CIDs.
Lawsuits put financial strain on the CID and homebuyers by
causing potential special assessments, increased
assessments and borrowing from the reserve account to cover
legal fees.
This bill also requires community service organizations,
which are supported by assessments on members, to provide a
financial statement to members and the association. This
information will also be used by the association to assess
reserves. Currently, although CSOs receive fees from
members they are not required to provide any financial
information to the membership. In addition, this bill
requires financial statements produced by the association
to be prepared using a straight-line accounting method.
Straight-line accounting method is defined as depreciating
a capital asset by the same amount each year over the
asset's useful life.
2. Concerns with the bill. Two groups have expressed
concerns regarding Assembly Bill 2718. The first, the
Congress of California Seniors (CCS) has expressed "grave
concerns." CCS agrees with the author that reserve
accounts do need to be addressed but their concern is that
after an association has saved up for capital expenses,
association boards may then without the knowledge or
consent of homeowners "raid the reserve accounts" and use
those funds for purposes other than capital expenses. CCS
is extremely concerned with this ability to access the
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reserve funds for "other purposes" especially since the
California Research Bureau recently reported that
California common interest developments currently control
cash totaling between $6 to 7 billion dollars.
CCS has suggested several amendments in order to address
their concerns, one of these suggested amendments deals
with notifying homeowners when reserve funds might be used
for purposes other than for capital expenses. The
committee may wish to consider amending the bill to require
a homeowner association to give at least 30 day notice
prior to any board meeting that has use of reserve funds on
its agenda for non-capital expenses.
The second group, the American Homeowners Resource Center,
has also expressed concerns with the bill. Their concerns
deal with the provision that allows "reasonable duplication
charges." When a prospective homeowner is contemplating
purchasing a separate interest in a common interest
development, the association is required to provide that
prospective homeowner copies of the minutes, the bylaws,
among other things as part of the process of purchasing
that separate interest. The association is required by
law to provide these documents to the prospective homeowner
but is allowed to charge you a copying fee. The American
Homeowners Resource Center argues that this provision of
current law has led to unscrupulous management companies
taking advantage of homeowners. The author responds that
it has been brought to their attention that some of these
management companies charge higher on one end (the
prospective homeowner) in order to charge the association
less for other services rendered, such as, keeping the
books, which costs are shared amongst all current
homeowners. Therefore, reducing costs on one end might
lead to the increase of costs at the other end.
3. Conflict with AB 2598 (Steinberg). The author has been
informed by Legislative Counsel that there is a conflict
with Assembly Bill 2598 (Steinberg). AB 2718 incorrectly
shows this section as and "add" and AB 2598 correctly shows
it as an "amend". The amendments proposed to be taken
would correct the conflict by giving AB 2598's 1365.2 a
new section number.
Previous Actions:
Assembly Floor:
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80-0
Assembly Judiciary: 11-0
Assembly Housing and Community Development: 21-0
Support and Opposition : (6/16/04)
Support : Executive Council of Homeowners
Opposition : American Homeowners Resource Center, unless
amended
Congress of California Seniors, unless amended