Common Interest Developments - Ownership Rights

September 21, 2007Common Interest Development Committee
Legislative Committee
                                                                                                                    
[This material is for discussion purposes only and has not been approved by the Common Interest Development Committee, Legislative Committee, Executive Committee or the Board of Directors]

Issue: Should C.A.R. sponsor legislation to provide that an individual’s ownership interests in a Common Interest Development (CID) cannot be changed during the termof his or her ownership and that a subsequent owner’s interests can only be changed pursuant to a written ballot approved by 2/3 of the CID association membership?

Action: Optional

Options
1) Sponsor legislation.
2) Create a support program for local REALTORS® fighting CID occupancy restrictions.
3) Do nothing. Address CID rental occupancy restriction incidents on a case-by-case basis (Status Quo).
4) Other

Status/Summary
In 2007 the CID Committee Chair appointed a Working Group to examine the issue of rental restrictions being imposed upon CID property owners and bring a report to the CID Committee could consider for recommendation to the Board of Directors. The Working Group reached consensus on the following language:

That the California Association of REALTORS® sponsor legislation in 2008 providing that the rights of an owner in a common interest development to own, occupy, lease or sell his or her ownership interest shall not be changed throughout the duration of such ownership, and such rights of a subsequent owner can only be affected by a 2/3 affirmative vote by the members of the association pursuant to a written ballot.

History
At various times in 2005 and 2006, several local associations of REALTORS® requested C.A.R. to investigate the issue of occupancy restrictions in common interest developments. The CID Committee considered the matter during its January 2006 meeting and concluded that more research was necessary. The “Occupancy Restrictions” Working Group was constituted at the January, 2007 meeting of the CID Committee in order to continue the Committee’s research of this issue. The WG consists of 10 members, including the CID Committee Chair and a Vice Chair. Two conference calls were conducted by the WG in 2007. Extensive discussions occurred on both calls. Focus was initially directed to “Single Family Residential (SFR) Detached” residential communities that have, or are proposing, occupancy restriction revisions to their CC&Rs or HOA rules. This was done primarily due to the fact that current case law, and Freddie Mac/Fannie Mae underwriting guidelines requiring at least 50% owner occupancy within a CID as a pre-condition to financing, applies to condominiums and other types of CIDs, but not SFRs.The WG was essentially divided into 3 “camps” during the first conference call discussion:
-Leave it alone and address it on a case-by-case basis as most WG Members have not  encountered the problem;
-State-wide prohibition of CID Occupancy Restrictions is a must to protect property rights of the homeowners; and
-Deal with itregionally, not on a state-wide basis, to avoid “awakening a sleeping giant”. (Out of more than 41,000 CIDs in the state, there are less than 100 that have considered and/or implemented occupancy restrictions.)Discussion   
During its first conference call, the WG unanimously approved a suggestion to create an “Outreach Questionnaire” on the occupancy restrictions experience. With input from WG Members, the WG Chair, CID Chair and CID Committee Staff compiled the Questionnaire. WG Members distributed it within their respective regions. CID Committee Members and Regional Chairs were also requested to circulate the questionnaire within their respective regions. The WG goal was to secure a better understanding ofthe scope and level of REALTOR® interest in the CID occupancy restriction issue. The second conference call followed compilation by Staff of the Questionnaire responses. Additionally, the Inland Valleys Association of Realtors (IVAR) and the PacificWest Association of Realtors (Pac West) also distributed a survey among their respective membership to determine the level of interest on this issue in their areas. The results of the WG Questionnaire and the IVAR/Pac West Survey are combined and summarized below:1. Number of respondents who have experienced any issues involving Occupancy Restrictions on a real estate transaction in their region: Yes- 87 No- 250 2. State the exact nature of the restriction: Number ofoccupants as tenants limited; lenders wanted certain ratio of owners to renters; townhouse required owner occupancy & restriction on # of children in home; minimum of 3 months for any rental occupancy; no renting or leasing permitted;  will not permit more than 5% of all units to be rentals; no less than a one-year lease permitted; a 20% cap was imposed on the number of units that could be rented; and a unit cannot be rented until it has been owner-occupied for at least one year..3. Samplingof comments regarding prohibiting CID occupancy restrictions:
- The existence of more than a handful of rental units in one complex is not good; it hurts the real estate market when restrictions are placed on rentals, especially condo rentals.
-  The situation I am aware of was a disaster for the neighbors of a home leased to one of those “half-way houses” and the neighbors “flipped out”.
-Concern that too many rentals would eliminate FNMA/FHMC financing eligibility, as well as a perception that rentals meant poor maintenance issues.
- Oppose legislative restrictions on HOAs that try to protect their neighborhoods with reasonable restrictions on home ownership.
-Real estate industry should not getinvolved in the issue. Some brokers and agents will want restrictions on HOAs and some won’t.
- A HOA initiated a fee of $75 per month for each absentee owner on record. A $100 per month fee was assessed for every overcrowded unit that was defined as more than 4 occupants. .
- This issue represents a double-edged sword: do not want to see excessive rental activity abnormally deflate property values, and also do not wish to prevent property owners from exercising their right to a fruitfulinvestment property.
- In my experience, it is visibly obvious when homes in a HOA are rented. The renters park more cars and other vehicles on the street, and do not perform property upkeep like an owner does.
- Have not run across this problemrecently, but there has been a case in which we only had a choice between 2 lenders because conventional lenders would not lend, stating that the rental ratio was not acceptable.
- Too many rentals in a community bring down the values of units in the community.
-Home owner associations should be able to do whatever their board agrees on.Evolution of Issue     
Following review of the surveys results, the WG was moving toward a belief that this matter is more a regional than state-wide problem. Ever mindful of the C.A.R. policy as to protecting the property rights of property owners, however, the WG understood the arguments labeling CID rental/occupancy restrictions as both positive and negative for the CID propertyowner. A tentative conclusion as to the regional nature of the issue was further explored during the June 7 meetings of the WG and the full CID Committee. Following extensive discussions, a new direction was taken by the WG, as iterated below:New Direction - Following the June meeting, the “Occupancy Restrictions” Working Group of the CID Committee officially altered its focus from prohibiting rental restrictions to the protection of CID Owners’ property rights enjoyed at the time theybecome owners in the CID. The prevalent rationale was that rights of property owner in a Common Interest Development (CID) that vest with the owner at the time  real property within a CID is purchased should NOT be altered or diminished during the duration of the ownership by that owner.New Goal - Draft a legislative approach for consideration by the CID Committee in October to revise the Davis-Stirling Act that governs the operation and administration of CIDs. This legislation would seek to protectthe rights of a CID real property owner as to rights enjoyed by the owner at the time his/her real property in a CID was purchased.What is the Committee Recommendation?