BILL ANALYSIS Ó
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
FN: 0000506