BILL ANALYSIS                                                                                                                                                                                                    



                                                                  AB 1024
                                                                  Page  1

          Date of Hearing:  April 23, 2013

                           ASSEMBLY COMMITTEE ON JUDICIARY
                                Bob Wieckowski, Chair
                    AB 1024 (Torres) - As Amended:  April 10, 2013

                                  PROPOSED CONSENT
           
          SUBJECT  :  Real Property: Divided Lands

           KEY ISSUE  :  Should certain procedural requirements in the  
          Subdivided Lands Act be modified, and certain existing  
          exemptions extended, in order to facilitate the creation of  
          housing cooperatives? 

           FISCAL EFFECT  :  As currently in print this bill is keyed fiscal.  


                                      Synopsis 

          This non-controversial bill modifies certain requirements in the  
          Subdivided Lands Act, and extends existing exemptions, in order  
          to facilitate the creation of housing cooperatives, formally  
          referred to in statute as "stock cooperatives."  The purpose of  
          the Subdivided Lands Act (Act) is to protect persons who seek to  
          purchase lots or homes within a developer's subdivision.   
          However, some of these requirements - while appropriate in the  
          typical arrangement where a person buys and takes title to a  
          home within a development - are unnecessary or inapt when  
          applied to cooperative housing, where buyers are effectively  
          shareholders who own the entire project collectively.  This bill  
          would modify some existing requirements and extend to housing  
          cooperatives existing exemptions that apply to similar common  
          ownership forms, so long as the cooperative members are provided  
          adequate information and protection by other specified means.   
          Specifically, existing law requires a developer who seeks to  
          subdivide and sell parcels of land to submit information about  
          the property to the state Real Estate Commissioner, so that the  
          Commissioner may issue a "public report" that the developer in  
          turn must make available to all prospective purchasers.  This  
          bill would exempt a housing cooperative from this requirement if  
          certain conditions are met, just as similar modes of ownership,  
          such as limited-equity housing cooperatives, are presently  
          exempted.  In addition, this bill would make other changes,  
          discussed in the analysis, by modifying some existing  








                                                                  AB 1024
                                                                  Page  2

          requirements for, or extending some existing exemptions to,  
          housing cooperatives.  The author believes that these changes  
          will facilitate the creation of housing cooperatives and thereby  
          increase access to more affordable housing.  This bill recently  
          passed out of the Assembly Committee on Housing and Community  
          Development on a 7-0 vote and has no known opposition.

           SUMMARY  :  Eliminates certain requirements and expands existing  
          exemptions relating to subdivided lands in order to facilitate  
          cooperative ownership of housing.  Specifically,  this bill  :  

          1)Exempts a stock cooperative or community apartment project  
            from the requirement to obtain a public report from the  
            Department of Real Estate (DRE) 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 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 may provide  
            financing to a limited equity housing corporation (LEHC) or  
            workforce housing cooperative trust to include a state or  
            federally chartered credit union or a certified community  
            development financial institution (CDFI).

          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:









                                                                  AB 1024
                                                                  Page  3

             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  
               within one year of 50% of the shares being sold and  
               maintain a financing reserve equal to at 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  
            (CIDs) 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)Allows 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)Defines "subdivided land" or "subdivision," for purposes of  
            the Subdivided Lands Act, to mean land that is divided or  
            proposed to be divided into five or more parcels for purpose  
            of sale or lease and provides for the regulation of such lands  
            by the DRE.  (Business & Professions [hereafter B&P] Code  
            Sections 11000 et seq.) 

          2)Requires any person who intends to offer subdivided lands  
            within this state for sale or lease to file with the DRE an  
            application for a public report consisting of a notice of  
            intention and a completed questionnaire that provides  
            information about the land, including, among other things, a  
            legal description of the land and true statements about the  
            condition of title and any liens, debts, or other  
            encumbrances.  (B&P Code Section 11010.) 

          3)Prohibits the selling or leasing of lots or parcels in a  
            subdivision that is subject to a blanket encumbrance, as  
            defined, unless the terms of the blanket encumbrance or a  
            supplemental agreement contain a release clause that permits  








                                                                  AB 1024
                                                                  Page  4

            the buyer or lessee to obtain legal title upon compliance with  
            specified terms and conditions.  (B&P Code Section 11013.1.) 

          4)Permits, notwithstanding the above provision, a subdivision to  
            be offered for sale subject to a blanket encumbrance without a  
            release clause if the following 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 Real Estate (Commissioner)  
               determines is sufficient to protect a purchaser and is  
               deposited into an escrow account, as specified.  
             b)   The title to the subdivision is going to be held in a  
               trust that the Commissioner determines is acceptable until  
               a release can be obtained;
             c)   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 
             d)   The Commissioner provides an alternative requirement  
               which is deemed acceptable to protect the interest of the  
               purchaser or lessee.  (B&P Code Section 11013.2.)

          1)Provides that a limited-equity housing cooperative or a  
            workforce housing cooperative trust  is exempt from certain  
            requirements of the Subdivided Lands Act if it complies with  
            certain conditions, including the following:

             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 limited-equity housing cooperative that has a regulatory  
               agreement approved by the Department of Housing and  
               Community Development (HCD);
             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 is duly executed between the  
               recipients of the financing and either a federal or state  
               agency, as specified, or a local public agency provides the  
               financing under a regulatory agreement that meets HCD's  








                                                                  AB 1024
                                                                  Page  5

               standards;
             d)   There are governing instruments for the organization and  
               operation of the cooperative;
             e)   There is ongoing fiscal management of the cooperative;
             f)   Membership information is distributed to any perspective  
               purchaser prior to purchase;
             g)   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;
             h)   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;
             i)   The developer of the cooperative must claim the  
               exemption from the Subdivided Lands Law with the Bureau of  
               Real Estate (BRE) on a form provided by BRE and which BRE  
               will keep for four years.  (B&P Code Section 11003.4.)

           COMMENTS  :  Under California law, a housing cooperative - or  
          "stock cooperative" - is created when a corporation is formed  
          for the purposes of holding title to a property, and where all  
          or most of the members or shareholders of the corporation are  
          entitled to lease a unit in the property.  On the surface, a  
          housing cooperative may look a great deal like a condominium or  
          a common interest development (CID), but the ownership structure  
          is different.  For example, in a typical condominium or CID, an  
          owner holds title to a separate interest or unit within the  
          development and has the right to use any common areas.  In a  
          housing cooperative, however, the owners are effectively  
          shareholders in a corporation that holds title to all of the  
          property.  All of the property is effectively "common area," and  
          each owner (or shareholder) leases a unit in the whole.   
          According to the author, housing cooperatives lower the barrier  
          to property ownership and create an important vehicle for the  
          creation and preservation of affordable housing.  This measure,  
          the author believes, will remove some of the more significant  
          barriers to developing cooperative housing by extending existing  
          exemptions that presently apply to other forms of common  
          ownership and by making other minor amendments to facilitate the  
          approval and effective operation of housing cooperatives.  

           Background  :  The Subdivided Lands Act requires a "subdivider,"  
          or developer, who wants to offer subdivided lands for lease or  
          sale to first file an application for a "public report" from the  








                                                                  AB 1024
                                                                  Page  6

          state Commissioner of Real Estate (Commissioner).  The  
          application consists of a notice of intent to sell the  
          properties and the completion of a questionnaire that sets forth  
          important information about the property, including a legal  
          description of the property and a recital of any debts, liens,  
          or other encumbrances that might cloud title to the property.   
          Based on the information in the application, the Commissioner  
          creates a "public report" that the developer must present to  
          prospective buyers or lessees.  The purpose of the Subdivided  
          Lands Act in general, and the public report in particular, is to  
          protect prospective purchasers from fraud by providing them with  
          important and relevant information about the property.  

          However, the Subdivided Lands Act - as meandering and cumbersome  
          a statute as one will ever find - creates a number of  
          exemptions, including exemptions for various forms of common  
          ownership.  The rationale for these exemptions appears to be  
          fairly straightforward:  where the owners have mutually decided  
          to hold the several parcels or units collectively or in common,  
          there is less need for the kinds of reporting and related  
          requirements that might be more appropriate in a relationship  
          between buyer and seller with potentially conflicting interests.  
           This is not to say that the Act does not provide protections to  
          persons who buy or hold property collectively or in common.  For  
          example, under existing law a "limited-equity housing  
          cooperative" is exempt from the public reporting requirement of  
          the Act, but only if the agreement forming the cooperative and  
          any governing documents meet certain requirements, including  
          disclosing to the cooperative members the kind of relevant  
          information that might appear in a public report issued by the  
          Commissioner.  (See e.g. B&P Code Section 11003.4(b) (3)  
          (A)-(D).)

           "Blanket Encumbrance" Exemption  :  In addition to eliminating the  
          need for costly public reports, this bill would also remove  
          existing barriers to the kinds of shared financing arrangements  
          that characterize housing cooperatives.  For example, existing  
          law prohibits the sale of cooperative shares if the units are  
          subject to a mortgage secured by the entire property, or a  
          "blanket encumbrance."  According to the author and supporters,  
          this prohibition frustrates and nearly prohibits the forming of  
          housing cooperatives in California because most cooperatives  
          finance the purchase with a single mortgage.  This bill would  
          exempt housing cooperatives from this prohibition so long as  
          other safeguards are in place. 








                                                                  AB 1024
                                                                  Page  7


          Finally, because housing cooperatives are also regulated in part  
          by the Davis-Stirling Act, which primarily regulates CIDs, this  
          bill makes one minor amendment:  it will exempt a stock  
          cooperative from Davis-Stirling requirements relating to the  
          election of a Board of Directors if the bylaws of the  
          cooperative provide that all members or shareholders  
          automatically become directors. 

           ARGUMENTS IN SUPPORT  :  According to the sponsor, the California  
          Center for Cooperative Development (CCCD), housing cooperatives  
          "offer home ownership opportunities for low and moderate income  
          households, and are important to creating and preserving  
          affordable housing."  CCCD argues that this bill will usefully  
          exempt housing cooperatives from costly public report  
          requirements, but only under circumstances that protect  
          potential buyers "and assure that they have the information they  
          need to make informed decisions."  It will also make reasonable  
          changes that better facilitate cooperative financing  
          arrangements.  The Sustainable Economies Law Center and several  
          other non-profit entities that promote housing cooperatives  
          support this bill for substantially the same reasons. 

           REGISTERED SUPPORT / OPPOSITION  :   

           Support 
           
          California Center for Cooperative Development (sponsor)
          Bay Area Community Land Trust
          East Bay Cooperative Housing California
          Sustainable Economies Law Center
          San Francisco Community Land Trust
          Walnut House Cooperative 
          Two individual letters

           Opposition 
           
          None on file 
           
          Analysis Prepared by  :  Thomas Clark / JUD. / (916) 319-2334