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|SENATE RULES COMMITTEE | AB 2718|
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THIRD READING
Bill No: AB 2718
Author: Laird (D)
Amended: 7/6/04 in Senate
Vote: 21
SENATE HOUSING & COMM. DEV. COMMITTEE : 8-0, 6/21/04
AYES: Ducheny, Hollingsworth, Ackerman, Alarcon, Cedillo,
Dunn, Florez, Torlakson
NO VOTE RECORDED: Vacancy
SENATE JUDICIARY COMMITTEE : 4-0, 6/29/04
AYES: Escutia, Ackerman, Kuehl, Sher
NO VOTE RECORDED: Morrow, Cedillo, Ducheny
ASSEMBLY FLOOR : 80-0, 5/27/04 - See last page for vote
SUBJECT : Common interest developments
SOURCE : California Association of Realtors
DIGEST : This bill creates a standardized reserve account
disclosure form to inform homeowners and prospective
purchasers of the current and anticipated assessments and
status of the reserve accounts of the homeowners'
association.
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, and community
CONTINUED
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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
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.
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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.
This bill requires 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:
1.The current assessment.
2.Assessments that have been levied by the board but which
have not taken effect.
3.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 also:
1.Requires the summary to be included with each disclosure
regarding association accounts.
2.Requires that the review of the financial statement of
the association to be prepared using a simplified reserve
fund of calculation.
3.Requires an association to distribute an operating budget
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.
4.Provides the association may charge only for the "actual"
cost of reproducing association documents during transfer
of title.
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5.Requires 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.
6.Define a "qualified person" as a natural person or entity
that is licensed as a general contractor or other
business or profession that allows the person to design,
install, construct, repair, restore or replace a major
component.
7.Requires 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, this bill requires a financial statement so
that the association could prepare the summary and requires
the association to make the information provided by the CSO
available to homeowners.
Comments
Purpose of the Bill . CIDs 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's office, 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
consulting firms which prepare the reserves studies for
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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's
office, 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 State 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 CSOs, 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.
FISCAL EFFECT : Appropriation: No Fiscal Com.: No
Local: No
SUPPORT : (Verified 7/6/04)
California Association of Realtors (source)
Community Association Institute
Congress of California Seniors
Executive Council of Homeowners
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OPPOSITION : (Verified 7/6/04)
American Homeowners Resource Council
California Alliance for Retired Americans
California Church IMPACT
Gray Panthers
Older Women's League of California
ARGUMENTS IN SUPPORT : Proponents argue this bill will
increase the accuracy of the reserve studies on the
physical plant of the development and provides homeowners
and potential purchasers with a standardized method of
calculating and a standardized form disclosing the status
of reserve accounts.
ARGUMENTS IN OPPOSITION : American Homeowner's Resource
Council (AHRC) states that "the overall thrust of the bill
is healthy" but opposes this bill because AHRC asserts the
existing fee an association may charge for reproducing
association documents during the transfer of title is one
that, if unpaid, could result in a lien and foreclosure.
AHRC requests that existing law permitting the recording of
a lien for unpaid 'transfer fees, and similar charges'
(Civil Code Sec. 1366.2) be repealed."
NOTE: The Senate Judiciary Committee staff has no opinion
on whether AHRC is correct that an unpaid transfer
document photocopying fee could result in
foreclosure. Committee staff notes that this bill
does not impact that question and only restricts the
fee to one that is reasonable based upon the
association's actual cost to procure, prepare and
reproduce the requested items, which appears to be
in the homeowner's financial interest.
ASSEMBLY FLOOR :
AYES: Aghazarian, Bates, Benoit, Berg, Bermudez, Bogh,
Calderon, Campbell, Canciamilla, Chan, Chavez, Chu,
Cogdill, Cohn, Corbett, Correa, Cox, Daucher, Diaz,
Dutra, Dutton, Dymally, Firebaugh, Frommer, Garcia,
Goldberg, Hancock, Harman, Haynes, Jerome Horton, Shirley
Horton, Houston, Jackson, Keene, Kehoe, Koretz, La Malfa,
La Suer, Laird, Leno, Leslie, Levine, Lieber, Liu,
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Longville, Lowenthal, Maddox, Maldonado, Matthews, Maze,
McCarthy, Montanez, Mountjoy, Mullin, Nakanishi, Nakano,
Nation, Negrete McLeod, Oropeza, Pacheco, Parra, Pavley,
Plescia, Reyes, Richman, Ridley-Thomas, Runner, Salinas,
Samuelian, Simitian, Spitzer, Steinberg, Strickland,
Vargas, Wesson, Wiggins, Wolk, Wyland, Yee, Nunez
NC:cm 8/4/04 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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