Many California real estate projects involve common interest developments (CIDs), in which property owners have rights to various common areas in addition to the premises they own outright. In order to provide for the maintenance of common areas, owners of units in a CID are required to be members of a homeowner association (HOA). The HOA has considerable power to regulate the properties within the CID and to collect fees and assessments from members. In California, the Davis-Stirling Common Interest Development Act (“Davis-Stirling”) governs HOAs. San Diego real estate investors are likely to encounter HOAs. New developments will require the creation of a new HOA, while investors who buy existing properties might be bound by HOA rules.
Common Interest Development
Davis-Stirling’s definition of a CID gives four specific examples: community apartments, condominiums, planned developments, and stock cooperatives. The two most well-known types of CIDs are probably condominium buildings or complexes and housing subdivisions.
A condominium is a single unit in a multi-unit building or complex. Instead of leasing individual units to tenants, the developer makes the units available for sale. Common areas include building exteriors; interior hallways, stairs, and elevators; and swimming pools, mailboxes, clubhouses, and other areas that are generally accessible by residents.
A residential subdivision often begins as a large tract of real estate owned by a developer, which builds streets and other infrastructure and divides the land into lots. The developer might build single-family residences on the subdivided lots, or it might allow third-party homebuilders to do so. In addition to streets and signage, common areas may include community areas like pools and green spaces. Both types of CIDs might have common expenses like security guards.
Apartment buildings typically have management companies that handle leasing and maintenance. HOAs serve a similar function, and Davis-Stirling gives them wide latitude to do so. When a developer is ready to begin selling units, it gradually turns over responsibilities to the HOA, which is a separate organization. The developer might retain voting rights in the HOA until it is ready to exit altogether, after which the property owners run the organization themselves.
From property owners’ point of view, HOAs serve a quasi-governmental function. One California court noted that HOAs “function almost as a second municipal government, regulating many aspects of the homeowners’ daily lives.” At the same time, the governance of a typical HOA is similar to that of a corporation, with individual directors shielded from liability and a significant amount of judicial deference to decisions by HOA directors.
Covenants, Conditions, and Restrictions
Anyone buying a property in a CID, including investors, must be a member of the HOA. The developer establishes rules, commonly known as Covenants, Conditions, and Restrictions (CC&Rs), when it creates the HOA. Members can modify or amend the CC&Rs later, based on procedures outlined in the HOA’s bylaws.
CC&Rs may regulate numerous aspects of the properties within the CID, and they are generally valid and enforceable as long as they do not violate the law or conflict with public policy. This might include restrictions on the appearance of houses in order to maintain common visual elements. Once a buyer has closed on the purchase of a CID property, they are bound by the CC&Rs.
Powers of Homeowner Associations
HOAs may use a variety of means to enforce CC&Rs and to collect fees. This includes the right to assess fines, to file suit to collect fees or fines and to enjoin further violations, and to place liens on property.
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