BILL ANALYSIS                                                                                                                                                                                                    

                                                                  AB 1098
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          Date of Hearing:  April 26, 2005

                           ASSEMBLY COMMITTEE ON JUDICIARY
                                  Dave Jones, Chair
                     AB 1098 (Jones) - As Amended: April 11, 2005

                              As Proposed to be Amended


          No longer limited to condominium associations, common interest  
          developments are now reported to be the dominant form of new  
          housing construction in California.  As the author reports, the  
          homeowner associations that run these developments have  
          important responsibilities and extensive power over the homes of  
          people who purchase properties in these developments.  In light  
          of these powers and responsibilities, supporters argue, this  
          bill is necessary to establish clear and fair election  
          procedures regarding key association functions, and to promote  
          fairness and transparency in the management of these  
          associations by detailing the financial records that homeowners  
          are entitled to inspect.  Association representatives, however,  
          argue that the compliance with the bill may be costly, and  
          consequently suggest that the reforms envisioned by the bill  
          should be voluntary or restricted.

           SUMMARY  :  Establishes election and financial records rules for  
          common interest developments.  Specifically,  this bill  :  

          1)Requires associations to comply with specified procedures  
            relating to election rules, voting, proxy ballots, and  
            election audits in any election regarding certain subjects,  
            including, among other things, the amendment of any governing  
            documents of the association and the membership of the  
            governing board of the association, and authorizes a member of  
            the association to enforce his or her rights under these  
            provisions and require a court to void the results of the  
            election upon a finding that the election procedures were not  


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          2)Requires associations, including an association still under  
            the control of a developer, to make specified association  
            records, such as the accounting books and records and the  
            minutes of proceedings of the association available for  
            inspection and copying by a member of the association, or the  
            member's designated representative, within 3 days of receipt  
            of the request, and applies these provisions to any community  
            service organization or similar entity that is related to the  

           EXISTING LAW  provides, pursuant to the Davis-Stirling Common  
          Interest Development Act, for the creation and regulation of  
          common interest developments, requires them to have a recorded  
          declaration containing specified information, permits them to  
          levy assessments, establishes, in certain situations, voting  
          requirements for amendment of the declaration and the levy of  
          assessments, and requires that a common interest development be  
          managed by an association.  (Civil Code section 1350 et seq.)

           FISCAL EFFECT  :   As currently in print, this bill is keyed  

           COMMENTS  :  The author identifies the purpose of the bill as  
          preserving common interest developments as affordable housing by  
          establishing clear election procedures and detailing the  
          financial records that are subject to homeowner inspection.
           Ensuring Clear and Fair Election Procedures  .  The author states  
          that the bill will promote the affordability of homes in common  
          interest developments by establishing clear election procedures  
          in order to ensure their integrity.  Supporters note that  
          elections are used to seat board directors of California  
          associations.  Directors now reportedly control between $6-7  
          billion in homeowner assessments and conduct elections to set  
          special assessments.  According to the author, AB 1098 will  
          require that:  (1) incumbents no longer control elections; (2)  
          ballots shall be secret; (3) opposition candidates shall have  
          equal access to the association's communication outlets; (4)  
          ballots shall be tallied by a neutral third party; and (5)  
          election outcomes can be audited.  These fundamental rights  
          would be enforceable by association members in a civil action; a  
          finding of non-compliance by the court would void the election  
          and require the reimbursement of the member's attorney's fees,  


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          along with a civil penalty in the discretion of the court.  

          The sponsor, California Alliance of Retired Americans (CARA),  
          states that these protections are necessary to ensure greater  
          integrity in elections.  "Such integrity is vital to the  
          Californians living in associations," CARA argues, "because  
          elections are used to choose board directors, who control  
          assessment dollars.  Elections are also used to impose special  
          assessments, amend governing documents, and sell and acquire  
          common areas."    

          CARA adds, "We have documented many instances of tainted - if  
          not downright fraudulent - elections used to impose assessments  
          on seniors, assessments which outstrip their fixed incomes.  We  
          have documented cases where seniors were intimidated and  
          threatened by the board or the property manager if they didn't  
          vote to agree to expensive assessments."

           Promoting Openness in Association Records  .  This bill would also  
          define in detail the "financial records" of the association, and  
          of its community service organization, and provide that  
          homeowners shall have the right to inspect and copy the  
          financial records of both.  

          CARA argues that this provision will promote greater  
          transparency in association operations.  According to CARA,  
          "Every year, California's 35,000 homeowner associations collect  
          an estimated $200 million in homeowner assessments.  Right now  
          they control an estimated $6-7 billion in cash."  CARA comments,  
          "In its study of the state's 36,000 common interest  
          developments, the California Research Bureau reported that  
          associations either do not disclose to homeowners how their  
          money is being spent or else they report it inaccurately.   
          Homeowner testimony to the California Law Revision Commission  
          confirms the Research Bureau's report.  The report also states  
          that between 14-20 percent of all lawsuits filed by shareholders  
          against associations are for financial mismanagement.  AB 1098  
          corrects this lack of disclosure by association boards and lack  
          of knowledge by homeowners.  It assures that association  
          shareholders - that is to say, homeowners - have access to the  
          association financial records to find out how boards are  
          spending the billions under their control.  It makes good fiscal  
          sense that homeowners - who have the biggest financial stake -  
          should be watching the books.    


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           ARGUMENTS IN OPPOSITION:   The Executive Council of Homeowners  
          (ECHO) states that it opposes the bill unless it is amended.   
          ECHO argues, "The electoral procedures outlined in this bill are  
          patterned after public sector voting practices which, in many  
          regards, are inapposite and unaffordable as a general rule in  
          nonprofit corporations.  No one has calculated the cost to  
          individual homeowners of imposing government-like election  
          practices in their small communities, when spread across a payer  
          base that is nothing like the populations of cities or counties.  
           (An "opt-in" system would be much more practical.)  Moreover,  
          no one has calculated the cost - or the resulting unlimited  
          liability - to associations and homeowners of statutes that  
          mandate records access of such massive public scope in private  
          communities.  The proper limitation is to 'financial books and  
          records,' properly defined."

          ECHO argues that community associations are more like nonprofit  
          corporations than local governments.  According to ECHO, "The  
          average community association has about a hundred members, which  
          is hardly government-like.  Community associations cannot fairly  
          and responsibly be commanded to operate like local government  
          when they've been granted neither government-like immunities nor  
          legislative privilege and have no elaborate staffs to guide  
          them.  Their exposure to liability without immunity or privilege  
          or commensurate guidance has no limit, a consequence we hope was  
          not intended."

          The Community Associations Institute has a similar position  
          regarding the disclosure of association records.  It states that  
          opening "all" records and accounting materials to association  
          members is "problematic" and it is willing to work with the  
          author to find more appropriate wording.

           Author's Technical Amendment  .  In order to correct a drafting  
          error on page 5, line 10, the author properly proposes to amend  
          the bill so that it reads: "Any member who  initiates  prevails in  
          a civil action shall be entitled to reasonable attorney's fees  
          and court costs, and the court may impose a civil penalty of up  
          to one thousand dollars ($1,000) for each violation. 


          California Alliance of Retired Americans (sponsor)


                                                                  AB 1098
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          Attorney General

          Community Associations Institute
          Executive Council of Homeowners

           Analysis Prepared by  :  Kevin G. Baker / JUD. / (916) 319-2334