*7/28 update: I discuss AB 3182's recent amendments at the end of this post.
While the bill's intentions may be good, and while California is certainly facing a housing crisis, voiding all but short-term rental and lease restrictions for California's 50,000-plus CIDs is the wrong solution. At its core, AB 3182 misses the "common interest" in common interest developments:
- Decreased Equity and Quality of Life. The purpose of use restrictions, maintenance requirements, architectural controls, and other provisions set forth in governing documents is to preserve and protect each owner's equity and right of quiet, safe enjoyment of their home. Yet many tenants are either unaware of such provisions or have little interest in compliance. Accordingly, communities with high rental rates frequently face problems related to parking violations, noise, overcrowding, damage to the common area, unapproved architectural changes, neglected maintenance, and more. These problems are especially acute in college, beach, and resort communities. Voiding rental and lease restrictions will increase such problems, thereby degrading each owner's equity and quality of life.
- Increased Costs. High resident turnover rates increases wear and tear on common area infrastructure. Voiding rental and lease restrictions will lead to higher common expenses for all owners.
- Reduced Owner Engagement. Owners who rent or lease their separate interest typically live offsite and have little interest in the day to day management or operation of their CID. As such, they tend to neglect their responsibilities under the governing documents, including their duty to pay assessments and perform maintenance. In addition, they tend to turn a blind eye to tenant violations so long as their rent is being paid. Absentee owners also have lower rates of board and committee service. Voiding rental and lease restrictions will increase such owner disengagement.
- Reduced Volunteering. As discussed in my other blog posts, Senate Bill 323 barred board service by non-owners. As such, even well-meaning, engaged tenants are now prohibited from serving on their board. With the reduced service rates of absentee owners, this means that communities with high rental rates will find it even harder to fill critical board positions.
- Impaired Creditworthiness. As a result of the above problems, most institutional lenders, such as the FHA and VA, require certain owner-occupancy thresholds, e.g., at least 50% of the units must be owner-occupied. Loans originating from such lenders are especially critical for first-time and other low to moderate-income buyers. Voiding rental and lease restrictions will negatively affect the availability and affordability of mortgage financing and the pool of potential purchasers for many owners, as well as the availability and affordability of financing for association capital improvements.
- More Expensive Insurance. As with lenders, insurers recognize the problems associated with high rental rates. Voiding rental and lease restrictions will negatively affect the availability and affordability of critical insurance coverage for many communities.
- Reduced Community Spirit. High resident turnover rates - and high rates of residents with little knowledge of or interest in the governing documents - undercuts the ability to form a cohesive community dedicated to the common good.
As with lenders, insurers, boards, and owners, California's courts have long recognized the problems associated with high rental rates and the critical importance of reasonable rental and lease restrictions in controlling them. See Nahrstedt v. Lakeside Village (1994) 8 Cal.4th 361; Colony Hill v Ghamaty (2006) 143 CA4th 1156; City of Oceanside v. McKenna (1989) 215 Cal.App.3d 1420. Sweeping away much of this well-established body of common-sense law will expose millions of California homeowners and CID residents to decreased equity, decreased quality of life, increased costs, and a host of other problems.
California is facing a housing crisis. That is undeniable. But voiding all but short-term rental and lease restrictions will threaten the "common interest" millions of California homeowners enjoy. The Legislature should look elsewhere for a solution to its problem.
In recognition of the above-noted issues with financing and insurance, the Legislature recently amended AB 3182 to permit governing document provisions limiting the total number of rentals to 25 percent of the separate interests. This welcome change is certainly to be applauded. That being said, I note the following issues with the bill, which I have communicated to its author:
- Perhaps AB 3182's amended Civil Code section 4740 should state "association" rather than "common interest development" in relation to actions. Real property cannot "adopt" governing documents (b), be "provided" with documents (e), or conduct voting (f).
- Does 4740(b)'s "either" mean "both"? Why not just state "an association may"?
- Shouldn't 4740(b)(2) state "lower," rather than "higher"? A higher percentage would permit MORE rentals, which is seemingly the bill's intent.
- In a related vein, perhaps 4740(b)(2) should state "25 percent or more" to clarify that higher caps are permissible. As drafted, the language suggests that only 25% caps are permissible.
- Why does 4740(b)(2) retain the word "reasonable"? Aren't its provisions per se reasonable, since they're permitted by statute?
- 4740 is inconsistent in its use of "rental or leasing" and just "rental."
- Most associations adopt lease restrictions via an amendment to or update of their CC&Rs, a costly and time-consuming endeavor that turns on the uncertain approval of the members. Given the fact that lender and insurer requirements can and do change, perhaps a provision should be included to permit unilateral amendments of CC&R caps by board action alone. This would protect associations from liability for overly-restrictive caps that no longer qualify under 4740(b)(2)(A)-(C), and from liability and the financial ill-effects of under-restrictive caps that do not meet lender or insurer requirements.
- 4740 does not address prohibitions on leasing by new owners. Restrictions of this nature are common in order to deter non-resident investment purchasers, and typically take the form of a requirement that new owners reside in the separate interest for the first one or two years of ownership before they may lease. Has the Legislature analyzed whether reasonable provisions of this nature further the bill's intent?