BILL ANALYSIS Ó 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