There is good news for owner of units in California common interest developments (CIDs). Assembly Bill 2100 (Laird) has passed the legislature and was recently signed into law by Governor Schwarzenegger. The bill was discussed in this column a few months ago. At that time it was characterized as a bill that would strengthen existing law with respect to the obligations of HOAs (Homeowner Associations) to plan for the eventual replacement and/or repair of major components such as roofs, streets, and common water heaters. Since then, the bill, while retaining its original intent, was also amended to include requirements yielding even more transparency to required financial statements supplied by HOAs to members.
To say that something is good news for owners of California CID units is to say that it is good news for a lot of people. There are more than 41,000 common interest developments in California, making up over three million housing units -- approximately one quarter of the state's housing stock. Not only are there a lot of such housing units in California, but also they provide the chief means by which many first-time buyers are able to gain entry into the housing market.
While there are many good things about CID ownership, one of the better-known downsides has to do with assessments. Dues and assessments are set by the homeowner association board of directors (in certain circumstances, special assessments must be approved by vote of the general membership). HOA directors -- being unit owners themselves -- are often reluctant to raise dues or to impose special assessments. It costs them money too, and it frequently makes their neighbors unhappy with them. But that's not good for them or the association in the long run.
Approximately 50 percent of California's common interest developments are more than twenty years old. The legislative analysis for AB 2100 put it this way: "As these developments mature the major components of the HOA including roofs and siding will require repair and replacements; however, many HOAs have not funded their reserves adequately … . A 1995 survey of HOAs found that on average reserves were [only] 59 percent funded." This, the analyst wrote, "leaves homeowners and new buyers of condominiums vulnerable to 'budget busting' special assessments in order to make the repairs for which funds could have been accumulated over a period of years."
It should never be a total surprise that a dues increase or special assessment is needed. Current law requires HOA directors to conduct an investigation at least every three years "of the major components which the association is obligated to repair, replace, restore, or maintain as part of a study of the reserve account requirement … ." Moreover, the board is required to provide the membership with an analysis of what it would take -- assuming adequate reserves are neither on hand nor foreseeable -- to collect and set aside sufficient funds to provide for the needs identified.
AB 2100 has added some new requirements to the reserve study that is presented to the membership. One is that, in the case of a reserve shortage, the amount needed to fully fund reserves is also to be calculated on a per-unit basis. It is one thing, especially in a large complex, to know that some large amount of money will someday be needed from the membership in order to keep things in good condition. It is somewhat more attention-getting to be presented with the information that your particular unit is going to be obligated for a specific amount.
Reserve reports must also indicate if the directors have decided to defer or not to replace or repair some component, along with the rationale for that decision. Finally, members must be notified that they are entitled to receive a full copy of the reserve report.
The real impact of AB 2100 comes into effect January 1, 2009. As of that date, the reserve study must also include a reserve funding plan. The reserve funding plan must specify how the association plans to fund the contributions needed to provide for the repair and replacement of major components. It must include "… a schedule of the dates and amounts of any changes to regular or special assessments that would be sufficient to fund the plan."
As it is now, a reserve study can in effect say, "This is how much we need if we are going to replace and/or fix things as they need it. We don't have that much, and at current assessment levels, we are not going to be able to set aside that much. Obviously, we are going to need something." AB 2100 requires an addition to that -- a plan. "On such and such date(s) we are going to raise the dues by so much, and on such and such other dates we are going to have special assessments for these amounts." Or something like that.
The reserve funding plan is to be adopted at an open meeting of the board. The actual assessments themselves are to be set at subsequent meetings according to the HOA by-laws and requirements of the civil code.
Nobody likes special assessments or increases in regular assessments. But nobody likes deterioration of their buildings or common area components either. At least, under the provisions of this new law, both current and prospective owners of CID units will have an opportunity to look at a plan and to know what can be expected. They could then make their own informed decisions accordingly.
