An Introduction to CID's
Prior to the mid 1960s, the typical family home in the United
States was almost exclusively the single-family detached house
located in a neatly arranged subdivision. There seemed to be an
unlimited supply of land. Each house was built on a separate lot.
Construction costs were moderate and stable. The sidewalks,
streets, lighting, other basic services (the infrastructure), and
any parks or recreational facilities in the neighborhood were
provided and maintained by the local government through taxes.
In recent years, land in desirable areas for home building has
become much scarcer and, consequently, more expensive.
Construction costs have continued to rise along with everything
else. Government can no longer afford to provide the same level
of service and variety of amenities to enhance the quality of
life as it has in the past.
The Challenge
In order to continue to produce affordable
housing and maintain an adequate housing supply for the
population, land use had to become more efficient, and
construction methods more economical. Ways to relieve local
government of the burdening costs of infrastructure had to be
discovered.
A Response
One response to the challenge came in various
forms of group or cluster housing coupled with shared ownership
of the land which, today, are collectively referred to as CIDs.
Currently, it is estimated that more than 31 million Americans
live in some type of CID. There are about 20,000 CIDs in
California alone, with new ones being built every day.
A CID is descriptive not only of a certain type of real estate
and form of home ownership, but also of a life-style that is
becoming more and more common to the American way-of-life. To
understand the concept, it is important to know that there is no
one structural type, architectural style, or standard size for
CIDs. They come in a variety of types and styles, such as
single-family detached houses, two-story townhouses, garden
apartments with shared "party walls," and
apartment-like, multi-storied high rises. While recent studies
indicate that the average-size CID in California is made up of 88
units, CIDs may, in fact, range in size from a simple two-unit
development up to a large complex having thousands of units, many
commonly owned facilities, and multiple associations under the
auspices of one overall master association. However, despite the
wide range of differences that may exist among CIDs, all CIDs are
similar in that they allow individual owners the use of common
property and facilities, and they provide for a system of
self-governance and some degree of service for the benefit of the
homeowners.
Something in Common
Legal Characteristics
CIDs have distinct legal characteristics that distinguish them
from other forms of home ownership. One important feature is that
the ownership in a CID combines individual ownership or the right
of exclusive occupancy of a residential unit with the shared
ownership of the common area within the development. Another
distinguishing trait is that owners in a CID are automatically
members of a homeowners' association that is responsible for the
operation and maintenance of the common area. This association
also provides for a system of self-governance. Finally, to pay
the costs of the operation of the association, CID owners are
assessed dues to cover their equitable share of the association's
expenses.
Comparing and Contrasting
Four types of CIDs are common in California: condominiums,
planned developments, stock cooperatives, and community
apartments. Condominiums and planned developments, two of the
most common CIDs, are similar to each other in that both provide
the owner with title (ownership) to a residential unit and the
right to use the common area within the development. The main
difference between condominium and planned development ownership
lies in the way title to the common area is held. In a
condominium, each homeowner has an undivided interest in the
common area with all the other owners in the development,
whereas, in a planned development, the homeowners' association
usually owns the common area.
By comparison, in the community apartment form of ownership the
homeowner owns a title interest in the development. In the case
of a stock cooperative, the homeowner owns a share of stock or a
membership interest in the corporate entity that owns the
structures and land comprising the CID. Coincidental with either
of these two forms of ownership, the homeowner has the exclusive
right to use a specific residential unit within the development.
The Association
Basic Structure and Early Operation
When a subdivider develops a CID, the subdivider must
simultaneously structure an association of the CID owners that
will be responsible for the ongoing management, operation, and
maintenance of the common area. In creating this association, the
developer must establish reasonable arrangements for the total
operation of the association, to include: levying assessments;
member and governing body meetings; voting and elections;
governing body duties; and rights and responsibilities of the
association. Initially, these arrangements must meet the
requirements of the Real Estate Commissioner's Regulations
administered by the DRE.
The DRE's regulations constitute the standards by which DRE
evaluates the governing instruments for subdivisions, however,
they do not constitute substantive requirements in and of
themselves. DRE's role with regard to CIDs is primarily one of
seeing that the initial subdivision offering is made under
reasonable arrangements.
The Declaration, By-laws, and Articles of Incorporation are the
documents used to establish the framework for the operation of
the association. They form the legal basis for the
"mini-government" of homeowners that is created. These
documents are generally enforceable in a court of law, if the
need ever arises. Once the original subdivider or his or her
successor in interest holds title to less than 25% of the lots or
units in the project, the association is free to change the
governing instruments as it sees fit as long as the changes are
consistent with the Common Interest Development Act. (See Civil
Code Section 1350 et seq.) Case law mandates that the developer
operate the association at all times in the best interest of the
homeowners throughout the marketing phase, up until such time as
the developer is no longer in control and the management and
operation of the association passes to the homeowners and their
elected representatives. Once this transition of power is
complete, sales by the developer cease and the homeowners are in
charge. The association becomes a totally independent entity
answerable to its membership.
Membership
The homeowners' association is unique to CIDs. It exists only to
serve a particular CID. Each owner in a CID automatically becomes
a member of the association on taking title to a lot or interest
in the project. Membership automatically terminates on the
transfer of title. Only owners are association members and all
owners must be members.
With the exception of associations in which the developer is in
control, each member of the association, generally, has one vote
for each subdivision interest owned. When a lot or unit is owned
by two or more persons as co-owners, the governing documents
usually provide for a method of determining how the one vote can
be exercised on behalf of the various owners.
Rights and Powers of the Association
The association must be given sufficient authority to effectively
manage, operate, and maintain the common area which typically
includes the landscaping, recreation facilities, private streets
and driveways, outdoor lighting, structures, roofs, fences, and
any other components of the common area of the CID. Powers
adequate for this purpose are set forth in the CID's governing
documents.
These powers are usually delegated by the association to a
governing body that must be elected by the membership at an
annual or special meeting. The procedures for the election and
for the removal of the members of the governing body are provided
in the governing documents.
Although the governing body is given the power and responsibility
to act on behalf of the association, if an action contemplated by
the governing body will have a material effect on the rights of
the membership, prior approval by at least a majority of the
association is sometimes required. Examples of actions requiring
such a vote are:
Levying a regular assessment on each unit or interest that is
more than 20% greater than the regular assessment for the
preceding fiscal year or special assessments which in the
aggregate exceed 5% of the budgeted gross expenses for that
fiscal year. These limits do not apply to increases necessary for
emergency situations. An emergency situation is defined as an
extraordinary expense: required by the court; or, necessary to
repair or maintain common areas or other areas for which the
association is responsible, which could not have been foreseen;
or, to remedy a threat to personal safety. The limitation set
forth above also does not apply to a special assessment to
reimburse reserves transferred temporarily by the governing body
to meet short-term cash flow requirements;
Where necessary, extending the term of the Declaration of
Covenants, Conditions and Restrictions.
The Governing Body
Powers and Duties
The powers of the association to manage the CID are normally
exercised by a board of directors or similar governing body that
is elected by the homeowners. The governing body is usually
delegated the complete authority to manage the affairs of the
entire project, subject to the control of the homeowners. The
specific duties and powers of the governing body, generally set
forth in the governing documents, normally include, but are not
limited to the following:
•Enforcement of the governing documents and any other
instructions necessary for the management of the project;
•Collection of assessments from association members for the
payment of taxes, insurance, and operational costs related to the
common area;
•Contracting for goods, services, and insurance on behalf of
the association, subject to some limitations;
•Delegation of powers to committees, officers, and employees
appointed and hired by the governing body to assist in the
management and operation of the association;
•Preparation of budgets and financial statements as called
for in the governing documents or as prescribed by law;
•Adoption and enforcement of rules for the operation and
control of the common area;
•Ability to take disciplinary action, including fines,
interest, and late charges, against association members who
violate the governing instructions;
•The right to enter a privately owned unit or interest in
connection with construction, maintenance or emergency repair for
the collective benefit of the owners;
•Election of officers of the governing body and filling
vacancies, except for one created through a removal by the
association membership; and
•Repair and maintenance of the common area.
Funding the Association
Regular Assessments
The sole source of income for most associations is assessments
levied on all owners in the project, including the developer, for
each interest or unit owned. (In CIDs where some owners may
receive greater services or benefits, assessments may be
determined by a formula or schedule that is based on the
proportional value of common area services provided.) Regular
assessments cover the day-to-day costs of running the
association, which include the management and operation of common
area recreational amenities such as swimming pools, clubhouses
and tennis courts, and services that include landscape
maintenance, security guards and scheduled social activities.
Regular assessments for all units or interests, including those
owned by the developer, in a single phase CID, or in a phase of a
multi-phase project, generally begin, for each phase, on the
first day of the month following the first completed sale. (A
single phase project is one completely developed at one point in
time; a multi-phase project is developed in increments at
different points in time.)
Special Assessments
Additionally, the governing body has the authority to levy
special assessments against all CID interests or units for major
repairs, replacements, or new construction on the common area or
for a one-time, unanticipated expense which cannot be covered by
the regular assessment (for example, insurance premiums that
unexpectedly "sky rocket").
The special assessment should not be confused with a monetary
penalty levied by the association against an individual homeowner
to reimburse the association for an expense such as damage to the
common area, or imposed as a disciplinary measure for a violation
of the rules and regulations.
Other Charges
Some CIDs establish user fees or special charges for uncustomary
services and activities. Typically, they are imposed on an owner
specifically benefiting from the service, such as an owner who
wants to use the common area pool, club house, or tennis courts
to entertain private guests. The fees are usually on a
pay-as-you-go basis, and they generally cannot become a lien on
the owner's unit or interest.
Limitations on Governing Body Authority
Procedures for establishing and collecting regular and special
assessments, late charges, interest, and fines are usually set
forth in the governing documents. Even if the governing documents
are more restrictive, the governing body may not, except in
unusual situations or with the vote of a prescribed percentage of
owners, impose a regular assessment that is more than 20% greater
than the regular assessment for the preceding fiscal year, or
special assessments which in the aggregate exceed 5% of the
budgeted gross expenses of the association for the current fiscal
year. The association must give owners notice, by first class
mail, of any increase in regular or special assessments. Current
law states that a late charge may not exceed 10% of the
delinquent assessment or $10, whichever is greater. However, the
governing instruments may specify a smaller amount. Also, any
interest charged may not exceed 12%, commencing 30 days after the
assessment is due. (See Civil Code Section 1366.)
Lien Rights
Once levied, the assessments, any late charges, reasonable
collection costs and interest assessed according to the law
become a debt of the owner of the separate interest. The amount
of the assessment plus the other described charges becomes a lien
on the owner's interest at the time the association files a
notice of delinquent assessment with the county recorder of the
county where the separate interest is located. The lien can be
enforced in any manner permitted by law, including the sale of
the property in order to recover money owed the association. If
and when the owner pays the amount for which the lien was filed,
the association must record a notice releasing the lien.
A statement describing the association's policy regarding lien
rights and other legal remedies must be delivered annually by the
governing body to the membership. (See Civil Code Section 1365.)
Budgeting for Today and Tomorrow
Reserves
Prompt payment of assessments by all owners including the
developer is essential, not only to cover the costs associated
with the day-to-day operating costs, but also to build a reserve
fund for future repair and replacement of major components of the
common area. The reserves are an important part of the
association's annual pro forma operating budget. They are
generally collected with the regular assessment and set aside in
a separate reserve account for the years to come. Ideally, all
major repair and replacement costs will be covered by funds in
the reserve account.
As the governing body is charged with the responsibility for
maintaining the association's property, it is important that the
accumulated cash be available when it is needed. Unlike an
independent homeowner who can cause a repair or replacement to be
made and pay for it out of his or her own pocket, the governing
body is dependent on the membership for funding.
An insufficient reserve fund at a time when a major repair or
replacement is needed usually results in the governing body
levying a potentially burdensome special assessment, borrowing
the money in extreme situations, or in some cases, deferring the
work. A decision simply not to perform the needed repair or
replacement might also be the response of a governing body afraid
of the consequences of making an unpopular decision or of one
operating at the "whim" of the electorate.
Such thinking and the failure of the association to adopt a
"pay as-you-go" plan for the future can create an
environment of declining property values due to the increasing
deferred maintenance and the association's financial inability to
keep up with the normal aging of the common area components.
This, in turn, can have a serious negative impact on sellers in
the project by making it difficult or even impossible for
potential buyers to obtain financing from an institutional
lender.
By contrast, a well-funded reserve goes a long way toward
maintaining property values within a CID. Not only does it help
eliminate the need for special assessments, but it spreads the
costs of predictable repairs and replacements over time. Healthy
reserves do away with the inequitable concentration of costs for
anticipated major repairs and replacements on the owners in the
project at the time the repair or replacement is required.
The law now allows the governing body to borrower from the
reserve fund to meet short-term cash-flow requirements or other
expenses. The money must be returned to the reserve fund within
one year unless the governing body can document that a delay in
repayment is necessary. Ultimately, a special assessment may be
required to repay the money. That special assessment would be
subject to the (5%) aggregate limitation discuss above. (See
Civil Code Section 1365.5.)
Reserve Study
A reserve study prepared by the association or professionals
hired by the association gives a current estimate of the cost of
repairing and replacing major common area components over the
long term, commonly thirty years. A reserve study generally
consists of an inventory of all the major component parts of the
common area, an estimation of the remaining useful life of each
component, as well as the cost of replacing each component at a
predicted time in the future. A well-prepared reserve study
allows the association, the owners, and potential buyers to
compare estimated required reserves with the reserve funds on
hand, and thereby serves as a guide to their respective future
actions. If the replacement value of the major components which
the association must maintain is equal to or greater than
one-half of the association's gross budget, the association must,
at least once every three years, cause a reserve study to be
completed and review that study annually in order to make any
necessary adjustments to the analysis of reserve account
requirements.
The DRE has two publications that would be useful in preparing a
reserve study: the "Operating Cost Manual," for budget
preparation; and "Reserve Study Guidelines for Homeowner
Association Budgets". For information on these and other DRE
publications, write to: Book Orders, P.O. Box 187006, Sacramento,
CA 95818-7006.
Distribution of Financial Statements
The law requires that the association prepare financial
statements for distribution to its members annually so that the
membership will have an accurate picture of the association's
financial position and level of preparedness for the future, and
so that the membership can participate in the financial
decision-making process. These financial statements include:
•A pro forma operating budget which shall include: estimated
revenues and expenses; a general statement describing procedures
used to calculate necessary reserves; identification of cash
reserves; an estimate of current replacement costs of and the
remaining useful life of the major components the association
must maintain; and a comparison, by percentage, of reserve funds
accumulated and the current estimate of necessary reserve funds,
with a statement as to whether any special assessment(s) will be
necessary for any repair or replacement or to augment the
accumulated reserves. (In lieu of the actual budget, the
association may choose to distribute to all owners a budget
summary with a notice that the complete budget is available upon
request.) An association which does not distribute the required
budget information to all owners may not impose an otherwise
permitted increase in the regular annual assessment without a
specified vote of the owners;
•A copy of a review of the financial statement done in
accordance with generally accepted accounting principles by a
licensed accountant for any association whose annual gross income
exceeds $75,000;
•A statement describing the association's policies and
practices in enforcing lien rights or other legal remedies for
default in payment of assessments. (See Civil Code Sections 1365
and 1366.)
Duties, Rights and Powers of the Individual
Owner
Duties and Responsibilities
In order that the association function successfully for the whole
as well as for the parts, the relationship of the collective
rights, duties, and responsibilities of the association to those
of the individual owner must be recognized. When a person
purchases in a CID, he or she assumes both collective and
individual obligations that are set forth in the governing
documents, California law, and rules and regulations adopted by
the association. These duties apply not only to the common area,
but also to the individual unit or interest that the person owns.
While the association is obligated to maintain the common area,
sometimes to the extent of maintenance and repair of the
exteriors of each owner's unit or interest, each owner is
responsible for the maintenance and upkeep of the interior of his
or her separate interest or unit. Typically, this includes the
carpeting and drapes, interior walls, cabinets, counter tops, and
the appliances and fixtures.
The individual owners may also have explicit maintenance
responsibility for exclusive use common areas such as private
yards, decks, and front doors. Sections 1351 and 1364 of the
Civil Code specifically designate internal and external telephone
wiring to serve a single separate interest as an exclusive use
common area. The owner of a separate interest will be allowed
reasonable access to the common area for the maintenance of
internal and external telephone lines, subject to the consent of
the association.
Each owner has the duty to pay assessments in a timely manner.
Failure to fulfill this financial obligation not only places the
association in financial jeopardy by creating a shortfall of
funds necessary to operate the project, but also subjects the
delinquent owner to potential interest charges, late fees, and
costs of collection, including reasonable attorney's fees.
In addition, each owner must accept personal responsibility for
his or her actions, as well as the actions of his or her guests,
children, and pets with respect to the common area and/or to the
other owners in the project. This personal obligation also
extends to each owner's role in ensuring maximum property value
for all units in the project by adhering to maintenance standards
appropriate to the project. This "pride-of-ownership"
is reflected in the upkeep of the individual unit or interest by
each owner.
Basic Rights
Along with the duties and obligations to the association, owners
have specific protection of their ownership rights under
California law, as well as through the governing documents. One
of the most basic of these rights is the owner's right to the
quiet use and enjoyment of his or her unit or interest, as well
as the right to use and enjoy the common area, subject to the
established rules and regulations, and to the rights of others.
While the association generally has the exclusive right to modify
or improve the common area, the individual owner has the right to
modify or improve his or her unit (accordingly to the
architectural controls and procedures in the governing documents
and the local building codes and standards, as applicable).
However, any such modifications or improvements must not
adversely affect the rights of other owners. The rights of
individuals to modify their units include handicapped owners, who
also have additional rights under federal and state laws to
improve the accessibility and livability of their units. (See
Civil Code Section 1360.)
CID owners have a basic right to be informed and to participate
in the operation of the association. In order that homeowners are
given this opportunity, the governing documents include specific
provisions for the association's giving notice of meetings,
posting and/or mailing of certain information, and disseminating
required financial statements, and other related information.
Right to Vote and Approve
Many governing documents grant CID owners the right to vote on
major issues affecting the association, such as:
•Election and/or removal of members of the governing body;
•Amendment and/or extension of the effective date of the
governing documents;
•Approval of some third-party contracts entered into by the
association;
•Approval of regular and special assessments in excess of
annual amounts of increase allowed by law;
•Approval of various other decisions and expenditures such
as improvement of the common area, annexation of other property
to the existing project, and selling property of the association.
Conclusion
A successful and viable CID is generally one in
which homeowners assume an active role in the association's
function, not only by attending meetings, voting, and paying dues
on time, but also by taking an active role in the actual
functioning of the association by running for the elected
offices, serving on committees, and generally participating in
group activities. It is one where owners have developed and
fostered a "sense of community". While the framework of
the association is the governing documents, it can certainly be
said that the "backbone" of the association is the
active and involved membership
