BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  AB 569
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          CONCURRENCE IN SENATE AMENDMENTS
          AB 569 (Chau)
          As Amended  July 1, 2014
          Majority vote
           
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          |ASSEMBLY:  |78-0 |(January 29,    |SENATE: |36-0 |(August 11,    |
          |           |     |2014)           |        |     |2014)          |
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           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  








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                 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.








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           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  








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          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  








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          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 


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