BILL ANALYSIS                                                                                                                                                                                                    



                                                                  AB 1024
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          ASSEMBLY THIRD READING
          AB 1024 (Torres)
          As Amended  April 10, 2013
          Majority vote 

           HOUSING             7-0         JUDICIARY           10-0        
           
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          |Ayes:|Torres, Beth Gaines,      |Ayes:|Wieckowski, Wagner,       |
          |     |Atkins, Brown, Chau,      |     |Alejo, Chau, Dickinson,   |
          |     |Maienschein, Mullin       |     |Garcia, Gorell,           |
          |     |                          |     |Maienschein, Muratsuchi,  |
          |     |                          |     |Stone                     |
          |-----+--------------------------+-----+--------------------------|
          |     |                          |     |                          |
          |     |                          |     |                          |
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           APPROPRIATIONS      17-0                                        
           
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          |Ayes:|Gatto, Harkey, Bigelow,   |     |                          |
          |     |Bocanegra, Bradford, Ian  |     |                          |
          |     |Calderon, Campos,         |     |                          |
          |     |Donnelly, Eggman, Gomez,  |     |                          |
          |     |Hall, Holden, Linder,     |     |                          |
          |     |Pan, Quirk, Wagner, Weber |     |                          |
          |     |                          |     |                          |
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           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  








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               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 (LEHC) 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).

          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  
               within 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 million 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  








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            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. 

           FISCAL EFFECT  :  Unknown.  This bill is keyed non-fiscal by the  
          Legislative Counsel. 

           COMMENTS  :  

          Background:  The supply of entry level affordable housing is far  
          short of demand for low to moderate-income working Californians.  
           The United States (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.  This bill  








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          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.  

          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  








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          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, 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 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 U.S. Treasury, have a  








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          primary mission of community development, and provide both  
          financial and educational services. 

           
          Analysis Prepared by  :    Lisa Engel / H. & C.D. / (916) 319-2085  



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