Think you’re an expert on homeowners’ associations (HOAs)? Then your business is in the Davis-Stirling Common Interest Development (CID) Act. It provides all the basic law regulating California’s CIDs.
Important changes to the Act took place in 2014. Read about them in the context below.
A brief history of the CID Act
Following the enactment of Proposition 13 (Prop 13) in 1978, local property tax revenues began a long-term slowdown which continues to this day. One foreseeable consequence was to leave gaps in funding needed to keep neighborhood services and structures intact.
Prop 13 limits property taxes to 1% of the property’s assessed value at the time of purchase, plus annual consumer-inflation limited adjustments. Prior to Prop 13, property taxes were closer to 3% of a property’s current market value. Further, taxes fluctuated annually based on changes in a property’s fair market value (FMV), a progressive tax based on wealth, not personal income (which is the denominator for consumer inflation).
So, when Prop 13 was enacted, property taxes did not follow the patterns of wealth gained in property values, as they previously did. Initially, this enhanced the wealth of all property owners as they now paid lower tax bills. The now consistent home annual assessment at consumer inflation rates provided a lower annual ceiling for property taxes.
All property owners now had annual tax bills that were more predictable in amount — inflation-limited, not wealth-related. However, the cap on property tax bills gradually reduced revenues local government agencies received which caused public services — which rely on property taxes for funding — to deteriorate.
In 1985, seven years after Prop 13 was enacted, California instituted the CID Act.
The Act allows HOAs or CIDs to:
- levy assessments on owners; and
- create binding rules for owners.
In 2012, California Assembly Bill 805 reorganized the Act and added additional measures. The 2012 changes took effect in January 2014.
Changes to the CID Act
The most significant changes to the Act were:
- Altering the governing documents. If the HOA or CID wishes to alter the governing documents to correct for changes to the Act, the HOA board does not need to call a vote from the full membership of owners — only the board of directors need vote. [Calif. Civil Code §4235]
- Annual budget disclosures. Disclosures need to be made in the HOA or CID’s annual budget report, which are to be distributed to owners 30-90 days before the end of the fiscal year, to include:
- a pro forma operating budget stating the estimated revenue and expenses accrued that year;
- a summary of reserves, including the HOA plan to build up reserves;
- an explanation on the board’s deferral of repairs or replacement of any major component of the project which has a remaining life of 30 years or less;
- a statement on the board’s intent to levy any assessments to repair or replace a component of the project, and if so the amount, when and how the levy is to be assessed;
- a detailed statement on any outstanding loans with an original term longer than one year owed by the HOA; and
- a summary of the association’s various insurance policies. [CC §5300]
- General notice delivery. Delivery of general notices to owners may be in the following formats:
- first-class mail;
- email or other electronic means when the owner has consented to receive electronic notices;
- inclusion in a billing statement, newsletter or similar document;
- posted in a prominent location designated for notices;
- inclusion in broadcast television if the HOA or CID regularly broadcasts information for owners this way; or
- individual delivery to an owner when the owner has specifically so requested. [CC §4245]
- Governing hierarchy. When an inconsistency is exists between the HOA’s or CID’s rules, the following priorities apply:
- the law;
- governing documents;
- the declaration;
- the articles of incorporation;
- bylaws; and
- operating rules. [CC §4205]
- Clarified rules on open forums. Owners, since they are members, are free to speak at any “membership meeting.” Previously, owners were permitted to speak at board meetings and “meetings of the association.” [CC §5000(b)]
- Exclusive use of common area. When an owner wants or requires their individual use of a common area, it may be granted by securing a two-thirds vote from the owners, or for the following reasons:
- when the property is to be conveyed to the subdivider to redevelop the space within the CID’s plan;
- to correct encroachments due to construction or improvements;
- when changes are due to a hardship, aesthetic considerations or environmental conditions;
- to transfer maintenance to an individual when the common space is not readily accessible or useable to other owners;
- to accommodate a disability;
- to grant an amenity, such as a parking or storage space, that is designated for assignment but not yet assigned by declaration to a specific unit; and
- to install electric vehicle charging stations as long as owners may still walk through the space. [CC §4600]
- Inspection of records, documents. Owners may inspect both association records and governing documents, upon written request. [CC §§5200, 5205]
- Requests in writing. The following requests from owners are to be written:
- change of information to the association membership list;
- the addition or removal of a second address on file;
- delivery of individual notices;
- opt out of the membership list;
- receipt of the annual budget or policy report;
- receipt of all HOA or CID reports. [CC §5260]
- Notice of board meetings. Owners need to be informed under general notification rules of all board meetings, even those that are regularly scheduled. [CC §4920]
- Voting with conflict of interest. A committee member or director needs to abstain from voting when they have a conflict of interest, which is includes:
- discipline of the director or committee member;
- assessment of the director or committee member due to damage of a common area;
- a request for a payment plan for the director or committee member’s overdue assessments;
- a decision on whether to foreclose an HOA lien on the separate interest of the director or committee member; and
- a decision on a proposed physical change or grant of exclusive common area use to the separate interest of the director or committee member. [CC §5350]
HOA costs are high for California owners
When purchasing a home subject to HOA rules, the homeowner is agreeing to additional rules and payments. These rules and fees can at times be stifling and hard to swallow. However, high monthly HOA fees are part of the trade-off homeowners make for owning California property after Prop 13.
CID owners get to keep low property tax rates like all other neighborhoods. However, they are also stuck paying high HOA fees to fund the maintenance of their community roads and roadway trees, security and patrols, sanitation, sewers, water mains, parking oversight — everything the local agencies provide to neighborhoods that are not CIDs.
Across California, the average monthly HOA fees are among the highest in the nation, at:
- $40 in Bakersfield;
- $129 in Fresno;
- $285 in Los Angeles;
- $315 in Riverside;
- $22 in Sacramento;
- $296 in San Diego;
- $300 in San Francisco;
- $290 in San Jose;
- $77 in Stockton; and
- $230 in Ventura, according to Trulia.
In many cases, high HOA fees make it significantly cheaper for families to rent their residence rather than buy. Ask any tenant in a CID project.
Before your homebuyer client views a property subject to HOA fees you need to disclose and make them aware of the cost of ownership. After all, it is material information since it may alter their decision as to which of several properties to buy, or the terms of an offer to purchase. These payments are nondeductible ownership costs (since they are paid via property taxes) and can significantly increase housing costs from project to project, and neighborhood to neighborhood.
If your homebuyer is still interested, before placing an offer on the property, review the HOA financial documentation for exposure to HOA liabilities, including a review of HOA operating statements and covenants, conditions and restrictions (CC&Rs).
When you represent a seller of a property in an HOA community, request these documents as soon as possible on taking the listing. Acquiring them before marketing a CID unit will save time and lost escrows down the road and help weed out buyers who are unable or unwilling to comply with the HOA financial conditions and rules.