BILL ANALYSIS Ó AB 569 Page 1 CONCURRENCE IN SENATE AMENDMENTS AB 569 (Chau) As Amended July 1, 2014 Majority vote ----------------------------------------------------------------- |ASSEMBLY: |78-0 |(January 29, |SENATE: |36-0 |(August 11, | | | |2014) | | |2014) | ----------------------------------------------------------------- Original Committee Reference: H. & C.D. SUMMARY : Makes several changes to the law to assist in the development and finance of cooperative housing. Specifically, this bill : 1)Expands the category of institutions that a Limited Equity Housing Corporation (LEHC) or workforce housing cooperative trust can receive financing from, to receive an exemption from the requirement to obtain a public report from the Bureau of Real Estate, to include a state or federally chartered credit union or a certified community development institution (CDFI). 2)Allows a stock cooperative or LEHC to be sold or leased subject to a blanket encumbrance if all the following conditions are met: a) Prospective purchasers are notified in the purchase contract that the property is subject to a blanket encumbrance; b) The property has obtained a public report from the Bureau of Real Estate (BRE) that accounts for the blanket encumbrance; and c) The governing documents require the association to create and maintain during the term of the blanket encumbrance all of the following: i) Prior to the sale of any individual interests, a financing reserve amount equal to at least two months of the amount of the debt service payments due on the blanket encumbrance. ii) Within one year of the sale of at least 25% of the AB 569 Page 2 individual interests, a financing reserve amount equal to at least three months of the amount of the debt service payments due on the blanket encumbrance. iii) Within one year of the sale of at least 50% of the individual interests, a financing reserve amount equal to at least five months of the amount of the debt service payments due on the blanket encumbrance. iv) Within one year of the sale of at least 75% of the individual interests, a financing reserve amount equal to at least eight months of the amount of the debt service payments due on the blanket encumbrance. 1)Exempts common interest developments (CIDs) from the election provisions of the Davis Stirling Act if the governing documents of the homeowners association (HOA) provide that all members of the CID are automatically members of the board of directors of the HOA. The Senate amendments create a graduated financing reserve schedule by allowing a stock cooperative or LEHC to be sold or leased subject to a blanket encumbrance if, in addition to notifying prospective purchasers of the blanket encumbrance and obtaining a public report from the BRE, the governing documents require the association to create and maintain during the term of the blanket encumbrance all of the following: 1)Prior to the sale of any individual interests, a financing reserve amount equal to at least two months of the amount of the debt service payments due on the blanket encumbrance. 2)Within one year of the sale of at least 25% of the individual interests, a financing reserve amount equal to at least three months of the amount of the debt service payments due on the blanket encumbrance. 3)Within one year of the sale of at least 50% of the individual interests, a financing reserve amount equal to at least five months of the amount of the debt service payments due on the blanket encumbrance. 4)Within one year of the sale of at least 75% of the individual interests, a financing reserve amount equal to at least eight months of the amount of the debt service payments due on the blanket encumbrance. AB 569 Page 3 FISCAL EFFECT : According to the Senate Appropriations Committee, pursuant to Senate Rule 28.8, negligible state costs. COMMENTS : Background: Nationwide, more than 1.2 million families of all income levels live in homes owned and operated through cooperative associations. Cooperative members own a share in a corporation that owns or controls the building and or property in which they live. Each shareholder is entitled to occupy a specific unit and has a vote in the corporation. Every month, shareholders pay an amount that covers their proportionate share of the expense of operating the entire cooperative which typically includes underlying mortgage payments, property taxes, management, maintenance, insurance, utilities, and contributions to reserve funds. Cooperatives can be townhouses, apartments, single family homes, student housing, senior housing, and mobilehome parks. The purpose of the cooperative structure is to prevent speculation, encourage long-term residency, and preserve the affordable character of the cooperative for future residents. Purpose of this bill: In California, a cooperative is created when a corporation is formed for the purposes of holding title to a property, and where all or substantially all of the members or shareholders of the corporation are entitled to lease a unit in the property. Cooperatives lower the barrier to property ownership, and create an important vehicle for the creation and preservation of affordable housing. This bill would remove one of the more significant barriers to financing cooperative housing. Blanket encumbrance: The California Subdivided Lands Act prohibits, with a few limited exceptions, the sale of cooperative shares when the units are subject to a "blanket encumbrance." A blanket encumbrance is a single mortgage taken out by the corporation and secured by the entire property. The prohibition on blanket encumbrances serves to protect cooperative members from losing their homes and investments in the event that one member of the cooperative fails to make payments to the single mortgage. However, the prohibition on blanket encumbrances has the effect of banning cooperatives in California, because lenders generally will not lend on AB 569 Page 4 individual units in a cooperative. In other parts of the country, including New York where cooperatives are a common form of ownership, cooperatives can finance the purchase of a building with a single blanket mortgage. This bill creates safeguards to protect members of cooperatives, while allowing a cooperative to obtain a mortgage. A cooperative could sell units subject to a blanket encumbrance so long as the cooperative builds and maintains a graduated debt service reserve, obtains a public report from the BRE, and cooperative members receive clear and specific notice of the risks of buying a share subject to a blanket encumbrance. Prior to the Senate amendments, the debt service reserve provision would have required cooperatives to build a reserve fund sufficient to make mortgage payments for three months. The Senate amendments create a graduated debt service reserve that, depending on the percentage of individual shares purchased, requires a cooperative to maintain between two and eight months' debt service reserve. Exempting LEHC from the Public Report Requirement: Current law exempts LEHCs from the public report requirement when a LEHC is financed by one or more agencies, listed in the statute, and when those agencies enter into a regulatory agreement to ensure proper structuring and operation of the LEHC. This bill would add state or federally chartered credit unions and state or federally certified CDFIs to the list of financing agencies qualified to enter into the agreement under the public report exemption. State CDFIs are certified by the Department of Insurance and must have community development as their primary mission and they must lend in urban rural or reservation-based communities in the state. A community development financial institution may include a community development bank, a community development loan fund, a community development credit union, a microenterprise fund, a community development corporation-based lender, or a community development venture fund. Federal CDFIs are certified by the United States Treasury, have a primary mission of community development, and provide both financial and educational services. Elections for board members in cooperatives: Cooperatives are by definition CIDs and must comply with the Davis Stirling Act (the Act). The Act requires elections to conform to an extensive process including requiring the HOA provide each owner with a double stuffed envelope in which to return a ballot. In AB 569 Page 5 some cases the bylaws of an HOA require all of the members to serve on the board of directors. Therefore election of the members is not required. This bill would exempt any CID from that procedure if, the governing documents require all members to serve on the board. Analysis Prepared by : Rebecca Rabovsky / H. & C.D. / (916) 319-2085 FN: 0004602