COMMON INTEREST DEVELOPMENTS

What is a Common Interest Development?

A common interest development is real property that combines individual ownership (separate interests) with property held and managed in common among all of the owners (common area.)

Are Common Interest Developments required to incorporate? Can they be incorporated? Advantages/Disadvantages?

CIDs are not required to incorporate (Civil Code §1363(a)) but they may incorporate and doing so can be advantageous. The primary benefit of incorporating an unincorporated association is to limit the individual owners' potential liability for the obligations of the association. Instead of “joint and several” liability of the members, the members' liability is limited to their share of any judgment that must be paid by the association. The calculation of an owner's share is typically based on each owner's share of assessment responsibility as per the governing documents (usually the CC&Rs).

Is there a state agency which has authority to regulate and oversee the affairs of Common Interest Developments? What is the scope of its power and authority?

The California Department of Real Estate (“DRE”) requires that developers submit an application, respond to a questionnaire, and upon complying with all DRE regulations, obtain the issuance of a public report before offering to sell or lease most types of common interest developments. The DRE reviews the suitability of the common interest development (title issues, financial arrangements, soil conditions, etc.), requires extensive disclosure to purchasers, and receives consumer complaints. Once the sale or leasing of interests in the development begins, the DRE's jurisdiction is limited to the developer's obligations under the public report and DRE's power is generally limited to preventing the marketing of any remaining interests that the developer may own within the development. (B&P Code §66410 et. Seq.)

On the state level, what are the annual reporting requirements of a Common Interest Development, if any, and to whom?

A nonprofit mutual benefit corporation must make annual financial reports to its members. The annual report must contain a balance sheet and an operating income statement; location of the membership list; and information regarding “interested persons” transactions. (Corp Code § 8322)

Additional annual reporting of specific items to the members of a CID is required under the Davis-Stirling Act. The annual disclosures must include an operating budget, review of financial statement, assessment collection and lien policies, insurance coverage disclosure, and a summary of ADR requirements. (Civil Code §§ 1365, 1363.650, 1369.590)

A domestic corporation statement of information (Form SI-100) and statement of common interest development (Form SI-CID) must be filed with the Secretary of State on a biannual basis. (Corporations Code § 8210) These forms provide the Secretary of State with updated information regarding the corporation's address, officers, agent for service of process, and managing agent.

Finally, an annual tax return must be filed with the Franchise Tax Board, or, if exempt, an annual information return must be filed. (Form 199 or 199-B)