Homeowners in Homeowner Associations Object to AB 2718

June 17, 2004

By Peter Amherst

There is considerable nervousness in the land these days about homeowner associations - HOAs for short. All of a sudden, the HOA industry is beginning to see large black clouds appearing upon the once sunny horizon. It was not so long ago, when the HOA industry confidently predicted the inevitable march of homeowner associations across the length and breadth of the land - and even the world.

Everybody would be sheltered within their comforting confines, and neighborhood blight would become a thing of the past, as humanity surged towards a world of neatly cut lawns and immaculately trimmed bushes.

But the HOA industry is beginning to have second thoughts about such rosy predictions.

Like humans, homeowner associations age. And like humans, it costs money to repair the ravages of age. Whether money alone can prevent their death is still an open question. Some studies of younger couples show they are shying away from homeowner associations because of their cookie-cutter conformity and oppressive regimentation.

But other studies are now beginning to appear that many homeowner associations may also face a very troubling financial future, possibly including the equivalent of financial cardiac arrest. Simply put, many homeowner associations have not been setting aside enough money to take care of the looming repairs. The California Research Bureau reports that between 14% and 20% of lawsuits against boards of directors are for financial mismanagement - primarily for a lack of reserve funds. One homeowner association in Northern California has already bitten the dust.

The California Association of Realtors (C.A.R) has been bitten in another way. Some of its members have been sued by their clients who bought homes through them. Buyers have discovered after they moved in that the association's reserves are not sufficient to fund future repairs and replacement of common area facilities - roads, lighting, pools etc. Some have been hit with painful special assessments to bring the reserves up to adequate levels. Some have been suing their realtors for not disclosing this information prior to purchase.

Hence C.A.R beat a hasty path to the door of Assemblyman Laird in Sacramento to introduce a bill to protect them from liability. In response, he introduced AB 2718 which, among other things, would require homeowner associations to disclose the financial information on the state of their reserves. He has created a standarized form in conjunction with C.A.R to detail this information.

So far so good, said homeowners.

But then they began to examine the details of the bill - and to have their doubts.

The bill would impose extra expenses on homeowner associations to hire, for example, contractors and accountants to estimate the useful life of common area components and how much was needed to repair or replace them. These costs, of course, are ultimately paid by the homeowner and could result in higher assessments. If a homeowner could not pay this higher assessment - a serious concern for many seniors on fixed incomes - the homeowner could lose their home in foreclosure.

Another ominous provision in the bill came from an amendment demanded by veteran HOA industry lobbyists, Community Associations Institute (CAI) and the California Legislative Action Committee (CLAC). Both of these organizations are composed primarily of lawyers and managers who make a living off homeowner associations.

In the initial version of AB 2718, there was a provision that the fees and costs incurred by a selling homeowner in obtaining the requisite information from the association for a potential purchaser, "may not exceed the association's actual and reasonable cost to prepare and reproduce the requested items" Sec. 1368 (b). The bill added "Fees or charges incurred pursuant to, and in compliance with, the requirements of Section 1563 of the Evidence Code shall be presumed to be reasonable." This code section allows 10c for a standard reproduction, and $6 per 15 minutes for clerical costs to locate and assemble documents.

Homeowners were happy to see this provision in the bill. For years, they had complained that the Davis Stirling Act repeatedly allowed "reasonable attorney fees", and "reasonable costs". Homeowners knew, however, that in practice the word "reasonable" meant "unlimited". They cite Merit Property Management, a large HOA management firm in Mission Viejo, California, which charges $75 an hour for the same work. The same company charges $550 to change the seller's name to the buyer's name in its computer.

But the happiness of the homeowners was short lived. The reference to the Evidence Code as a guide for charging fees was dropped. In the latest available version of the bill, May 25, 2004, the language reads: "the association may charge a reasonable fee for this service based on the association's actual cost to procure, prepare and reproduce the requested items". (This revised the previous version that "the association may charge a fee for this service that may not exceed the association's actual and reasonable cost").

The CAI and CLAC lobbyists have obviously being poring over this section in great detail. Homeowners, however, are saying that the tortured language merely camouflages the lobbyists' efforts to create another rip-off center for themselves. For example, homeowners say that the "reasonable" cost should be the "actual" cost. Instead, the bill allows a nice little loophole where the lawyers and managers can "base" what is reasonable on top of what is actual. "Reasonable" is "actual plus whatever the lawyers and managers want to add on top of it". They know that in the middle of the sale of a home, the seller is not going to hold up the sale to battle the costs charged by lawyers and managers. Homeowners say that the seller is the one who is being held up.

But homeowners say that there is something even more ominous about the bill.

In 1997, Assembly member Torlakson passed AB 1025, which is now codified in Civil Code Sec. 1366.2. The relevant section reads as follows:

" (a) In order to facilitate the collection of regular assessments, special assessments, transfer fees, and similar charges, the board of directors of any association is authorized to record a statement or amended statement identifying relevant information for the association."

At the time, homeowners protested that this would allow homeowner associations to foreclose on homes for such things as "transfer fees, and similar charges". Torlakson refused to listen to the homeowners' objections.

Now that the Laird bill is increasing "the transfer fees and similar charges", homeowner fears are resurrected again. Hence, they claim, that Laird bill may become another foreclosure lair. They have expressed these concerns to Laird's legislative aide, Clyde MacDonald, but he has adamantly refused to listen to them.

Homeowners feel that once again they are being crushed under the lobbyist juggernaut. Powerful special interests such as C.A.R are getting what they want - at the expense of the homeowner - and legislators hear the sound of campaign contributions more than the voices of their constituents. And then, legislators wonder why the public regards them on the same level as used car salesmen. Homeowners think that C.A.R may have additional connotations.