BILL ANALYSIS                                                                                                                                                                                                    



                                                                  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.
           








                                                                 AB 1024
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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