BILL ANALYSIS Ó
AB 1024
Page 1
Date of Hearing: April 17, 2013
ASSEMBLY COMMITTEE ON HOUSING AND COMMUNITY DEVELOPMENT
Norma Torres, Chair
AB 1024 (Torres) - As Amended: April 10, 2013
SUBJECT : Real property: divided lands
SUMMARY : Makes several changes to the law to assist in the
development and finance of cooperative housing. Specifically,
this bill :
1)Exempts a stock cooperative or community apartment project
from the requirement to obtain a public report from the Bureau
of Real Estate (BRE) if the following conditions are met:
a) Shares in the stock cooperative or community apartment
project are sold to no more than 35 people;
b) All shareholders live in the state;
c) All shareholders have a preexisting business or personal
relationship or by the nature of their business or finance
experience or by the business or finance experience of
their professional advisors who are not affiliated with or
compensated by the issuer of the shares, have a reasonably
assumed capacity to protect their own interests in
connection with a transaction;
d) Each purchaser is purchasing the share for themselves
and not to sell;
e) The offer or sale of shares is not done through an
advertisement; and
f) The entity issuing the shares files a notice with the
Commissioner of Corporations noticing the sale of shares in
the stock cooperative or community apartment project.
1)Expands the category of institutions that provide financing to
a limited equity housing corporation or workforce housing
cooperative trust, in order to allow the LEHC to be exempt
from the requirement to get a public report from BRE, to
include a state or federally chartered credit union or a
certified community development institution (CDFI).
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2)Allows a stock cooperative or LEHC to be sold or leased
subject to a blanket encumbrance if all prospective
purchasers are notified that the property is subject to a
blanket encumbrance and one of the following conditions is
met:
a) The property has or will receive a public report from
BRE;
b) The governing documents of the homeowners association
(HOA) of the stock cooperative require the HOA to be formed
with in one year of 50% of the shares being sold and
maintain a financing reserve equal to a least three months
of the amount of debt service payments due on the blanket
encumbrance during the term of the blanket encumbrance; or
c) Every purchaser in the stock cooperative is an
accredited investor with a net worth of $1,000,000 not
including their home or at least $200,000 in annual income
or $300,000 as a couple, or are close family members.
1)Exempts stock cooperatives from the election provisions of the
Davis Stirling Act governing common interest developments
(CID) if the governing documents of the HOA provide that all
members and shareholders of the cooperative are automatically
members of the board of directors of the HOA.
2)Allow members of a stock cooperative to bring a cause of
action to challenge the election of the board of directors in
a stock cooperative.
EXISTING LAW
1)Requires that when lands, lots or parcels of any size are
subsidized and financed or leased then the subdivision must
obtain a public report from the BRE unless one of the
following conditions exists:
a) The undivided interest are held or going to be held by
people who are related by blood or marriage;
b) The undivided interests are going to be purchased by
people who demonstrate to the satisfaction of BRE that they
are knowledgeable and experienced investors who comprehend
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the nature and risk in owning the interests. Restricted to
no more than 10 persons who must furnish BRE with a
statement that they understand the risk of purchasing, they
are purchasing with funds from their own account and for
their own use and do not plan to resell their interest and
that they expressly waive the protection provided to a
purchaser through disclosure of a public report;
c) The undivided interests are created subject to a
foreclosure;
d) The undivided interest is created by a court order or
decree; and
e) The offering or sale of undivided interests is in a CID
for which the Commissioner of Corporations has issued a
permit.
1)Provides that a limited-equity housing cooperative or a
workforce housing cooperative trust is exempt from the
Subdivided Lands Law (Business & Professions Code Section
11003.4 et al) if the cooperative complies with all of the
following conditions:
a) A public entity directly finances or subsidizes at least
50% of the total construction or development cost or
$100,000, whichever is less, of the limited-equity housing
cooperative or the real property on which the
limited-equity housing cooperative will be located was sold
by the Department of Transportation for the development of
a and limited-equity housing cooperative that has a
regulatory agreement approved by the Department of Housing
and Community Development (HCD) for the term of the
permanent financing;
b) No more than 20% of the total development cost of a
limited-equity mobilehome park and no more than 10% of the
total development cost of other limited-equity housing
cooperatives is provided by the members;
c) A regulatory agreement for at least the term of the
permanent financing or subsidy is duly executed between the
recipients of the financing and either a federal or state
agency as specified or a local public agency providing the
financing under a regulatory agreement that meets HCD's
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standards;
d) Assurances for completion of the common areas and
facilities to be owned or leased by the limited-equity
housing cooperative are in writing unless a construction
agreement contains these assurances;
e) There are governing instruments for the organization and
operation of the cooperative;
f) There is ongoing fiscal management of the cooperative;
g) Membership information is distributed to any perspective
purchaser prior to purchase;
h) Any federal, state or local public agency that executes
a regulatory agreement must be satisfied with the governing
documents of a limited-equity housing cooperative and other
agreements as specified;
i) Any federal or state agency that is providing a subsidy
to the limited-equity housing cooperative must receive a
legal opinion that the cooperative meets all the exemption
requirements;
j) Permits a limited-equity cooperative that meets all the
exemptions to choose to comply with the Subdivided Lands
Law (Business & Professions Code Section 11003.4 et al);
and
aa) The developer of the cooperative must claim the
exemption from the Subdivided Lands Law (Business &
Professions Code Section 11003.4 et al) with the Bureau of
Real Estate (BRE) on a form provided by BRE and which BRE
will keep for four years.
2)Makes unlawful for lots or parcels within a subdivision to be
offered for sale subject to a blanket encumbrance unless the
blanket encumbrance includes a release clause which allows a
purchaser of a lot or parcel to obtain legal title free and
clear of the blanket encumbrance by meeting the terms of the
lender.
3)Permits a subdivision to be offered for sale subject to a
blanket encumbrance without a release clause if the following
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conditions are met:
a) The purchaser or lessee deposits an amount that is the
entire sum of money paid for a lot or parcel or an amount
that the Commissioner of BRE determines is sufficient to
protect a purchaser is deposited into an escrow account
until:
i. A proper release can be secured;
ii. The owner, subdivider or agent, or the purchaser
or lessee, defaults on the sales contract; and
iii. The owner, subdivider or agent orders the return
of the deposited money to the purchaser.
a) The title to the subdivision is going to be held in a
trust that the commissioner of BRE determines is acceptable
until a release can be obtained;
b) A bond is issued to the State of California and
furnished to the commissioner which provides for the return
of the moneys paid or advanced by any purchaser or lessee;
and
c) The commissioner of BRE provides an alternative
requirement which is deemed acceptable to protect the
interest of the purchaser or lessee. (Business and
Professions Section 11013.2)
1)Exempts the sale of securities from the approval of the
Commissioner of Corporations if the following conditions
exist:
a) All shareholders have a preexisting business or personal
relationship or by the nature of their business or finance
experience or by the business or finance experience of
their professional advisors who are not affiliated with or
compensated by the issuer of the shares have a reasonably
assumed capacity to protect their own interests in
connection with a transaction;
b) Each purchaser is purchasing the share for themselves
and not to sell;
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c) The offer or sale of shares is not done through an
advertisement; and
d) The entity issuing the shares files a notice with the
Commissioner of Corporations noticing the sale of shares in
the stock cooperative or community apartment project.
FISCAL EFFECT : Unknown
COMMENTS :
Background : The supply of entry level affordable housing is far
short of demand for low to moderate-income working Californians.
The U.S. Department of Housing and Urban Development (HUD)
reports that 12 million renter and homeowner households pay more
than 50% of their annual income for housing. 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. Housing 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 housing cooperative
(referred to in statutes as a "stock 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. Housing cooperatives lower the barrier to
property ownership, and create an important vehicle for the
creation and preservation of affordable housing. AB 1024 would
remove some of the more significant barriers to developing
cooperative housing, in addition to making two minor amendments
to facilitate the approval and operation of housing
cooperatives.
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Public Reports for Housing Cooperatives : The California
Subdivided Lands Act requires that a new housing cooperative
with five or more units apply for and obtain a public report
from the BRE (formerly the Department of Real Estate) prior to
leasing a unit to a cooperative member. A public report is
designed to protect consumers by creating a set of documents to
inform purchasers of financial and structural matters related to
the purchase of a unit. To obtain a public report, a
cooperative must prepare numerous documents and forms, often
with the help of attorneys, accountants, and engineers and
submit the information to BRE. Obtaining a public report could
cost a new cooperative $10,000-$20,000 in professional and
filing fees, and could take up to a year. This bill creates an
exemption from the public report requirement when the purchasers
meet the requirements of California's Securities Limited
Offerings Exemption under Corporations Code 25102(f). This
allows cooperative members to lease their units and move in
without a public report when all of the members have a
pre-existing relationship with the cooperative and/or its
directors or organizers, and where the shares are not publicly
advertised. This mirrors the presumption made in California
securities law, which is that a pre-existing relationship
sufficient to allow the purchaser to know the business acumen or
financial status of the cooperative - as well as the
accountability created through pre-existing relationships - are
sufficient to allow a securities offering without need for
review and approval by a regulatory agency. This provision of
the bill would apply to situations where tenants organize
themselves to purchase their building and own it cooperatively.
Removing Barriers to Shared Financing : The California Subdivided
Lands Act prohibits, with a few limited exceptions, the sale of
housing cooperative shares when the units are subject to a
"blanket encumbrance." Blanket encumbrances most commonly take
the form of a 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 the cooperative defaults on
its mortgage. However, the prohibition on blanket encumbrances
has the effect of banning housing cooperatives in California,
because the most common way that a cooperative finances the
purchase of a building is by means of a single blanket mortgage.
This bill creates safeguards to protect members of cooperatives,
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while allowing a cooperative to obtain a mortgage. A cooperative
could sell units subject to a blanket encumbrance so long as
cooperative members receive clear and specific notice of the
risks of buying a share subject to a blanket encumbrance and the
cooperative has built a reserve fund sufficient to make mortgage
payments for three months, or obtained a public report from BRE,
or every investor has sufficient net worth to assume the risk of
a blanket encumbrance.
Elections for board members in cooperatives : Cooperatives are
by definition common interest developments and must comply the
Davis Stirling Act (the Act). The bill requires elections to
conform to an extensive process including requiring the
homeowners association to provide each owner with a double
stuffed envelope in which to return a ballot. In 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 cooperatives from that
procedure if, the governing documents require all members to
serve on the board.
Exempting LEHC from the Public Report Requirement: Current law
exempts Limited Equity Housing Cooperatives (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
community development financial institutions (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 U.S. Treasury,
have a primary mission of community development, and provide
both financial and educational services.
Double referred : If AB 1024 pass out of this committee, the
bill will be referred to the Committee on Judiciary.
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REGISTERED SUPPORT / OPPOSITION :
Support
California Center for Cooperative Development (sponsor)
Bay Area Community Land Trust
East Bay Cooperative Housing California
San Francisco Community Land Trust
Sustainable Economies Law Center
Walnut House Cooperative
Two individual letters
Opposition
None on file.
Analysis Prepared by : Lisa Engel / H. & C.D. / (916) 319-2085