BILL ANALYSIS                                                                                                                                                                                                    






           SENATE TRANSPORTATION & HOUSING COMMITTEE       BILL NO: ab 1024
          SENATOR MARK DESAULNIER, CHAIRMAN              AUTHOR:  torres
                                                         VERSION: 4/10/13
          Analysis by:  Mark Stivers                     FISCAL:  yes
          Hearing date:  June 18, 2013



          SUBJECT:

          Cooperative housing

          DESCRIPTION:

          This bill exempts a stock cooperative or community apartment  
          project from the Subdivided Lands Law under specified conditions  
          and allows a stock cooperative or limited equity housing  
          cooperative to be sold or leased subject to a blanket  
          encumbrance under specified conditions.

          ANALYSIS:

          Cooperative housing members own a share in a corporation that  
          owns or controls the building(s) 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.  

          Limited-equity cooperatives limit the resale value of shares.   
          Generally targeted at low- and moderate-income people (in the  
          80-120% of median-income range), the purpose of limited-equity  
          cooperatives is to prevent speculation, encourage long-term  
          residency, and preserve the affordable character of the  
          cooperative for a wide variety of future residents.

          The Subdivided Lands Law generally requires a person who  
          proposes to subdivide a property into five or more parcels for  
          purpose of sale or lease to obtain a public report from the  
          Bureau of Real Estate (BRE) before the subdivider may market the  
          lots or units.  This law is intended to ensure that prospective  
          buyers receive disclosure of pertinent information about the  
          subdivision and that developers complete improvements or arrange  




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          for their completion.  The law contains a number of exemptions,  
          including exemptions for various forms of common ownership.  For  
          example, a limited-equity housing cooperative for which a public  
          agency has provided the land or financed or subsidized at least  
          50 percent of the total construction or development cost or  
          $100,000, whichever is less, is exempt from the public reporting  
          requirement if the regulatory agreements provides assurances for  
          completion of the common areas and facilities and ensures that  
          every prospective purchaser receives prior to sale a membership  
          information report that contains full disclosure of the  
          financial obligations and responsibilities of cooperative  
          membership, rules regarding the resale of shares, the financing  
          of the cooperative, occupancy restrictions, management  
          arrangements, and any other information pertinent to the  
          benefits, risks, and obligations of cooperative ownership.

          The Subdivided Lands Law also generally prohibits the sale or  
          lease of lots or parcels within a subdivision if the lots or  
          parcels are subject to a "blanket encumbrance," which is a  
          mortgage secured by the entire property or more than one lot or  
          parcel.  This prohibition does not apply if the encumbrance  
          contains a release clause that unconditionally allows a  
          purchaser to obtain legal title free and clear of the blanket  
          encumbrance upon compliance with the terms and conditions of the  
          purchase or lease.  The prohibition also does not apply if all  
          of the following criteria are met, or if the Commissioner of  
          Real Estate (Commissioner) provides an alternative requirement  
          which he or she deems acceptable to protect the interest of the  
          purchaser:

           The purchaser deposits the purchase price, or an amount that  
            the Commissioner determines is sufficient to protect a  
            purchaser, into an escrow account.  
           The title to the subdivision is held in a trust that the  
            Commissioner determines is acceptable until a release can be  
            obtained.
           A bond is issued to the State of California and furnished to  
            the Commissioner that provides for the return of the moneys  
            paid or advanced by any purchaser. 
           The purchaser signs a notice making them aware of the blanket  
            encumbrance and its effect.

          Cooperative housing developments also fall under the  
          Davis-Stirling Act, which governs all common interest  
          developments (CIDs).  The Act requires that a board of directors  
          govern a CID and, when elections are held for the board of  




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          directors, specifies various election procedures, including use  
          of secret ballots and the appointment of an inspector of  
          elections.  
           
          This bill  :  

           Exempts a stock cooperative or community apartment project  
            from the requirement to obtain a public report from the BRE if  
            all of the following conditions are met:

                 Shares in the stock cooperative or community apartment  
               project are sold to no more than 35 people.
                 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.
                 Each purchaser is purchasing the share for themselves  
               and not to sell.
                 The offer or sale of shares is not done through an  
               advertisement.
                 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. 

           Expands the category of institutions that may provide  
            financing to a limited equity housing cooperative for purposes  
            of qualifying for the exemption from the Subdivided Lands Law  
            to include a state or federally chartered credit union or a  
            certified community development financial institution.

           Provides that public taxes and assessments levied by public  
            authority are not subject to the prohibition on blanket  
            encumbrances.  

           Allows a stock cooperative or limited equity housing  
            cooperative 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:

                 The property has or will receive a public report from  
               BRE.
                 The governing documents of the cooperative require the  




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               board of directors, within one year of 50% of the shares  
               being sold, to create and maintain during the term of the  
               encumbrance a financing reserve equal to at least three  
               months of the amount of debt service payments due on the  
               blanket encumbrance.
                 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. 

           Exempts stock cooperatives in which all members and  
            shareholders automatically become members of the board of  
            directors from the election provisions of the Davis-Stirling  
            Act that are applicable to the election of directors, except  
            for the provision allowing a member to bring a cause of action  
            to challenge the election of the board of directors. 
          
          COMMENTS:

           1.Purpose of the bill  .  According to the author, housing  
            cooperatives lower the barrier to property ownership and  
            therefore create an important vehicle for the creation and  
            preservation of affordable housing.  This bill will remove  
            some of the more significant barriers to developing  
            cooperative housing.  

            First, the bill allows for a cooperative to sell shares when  
            the development is subject to a blanket encumbrance.  It is  
            almost impossible to develop cooperative housing without a  
            mortgage on the property, which is a form of blanket  
            encumbrance.  Under current law, however, a cooperative cannot  
            sell shares if there is a blanket encumbrance.  As a result,  
            the current prohibition on blanket encumbrances has the effect  
            of banning housing cooperatives in California.  This bill  
            creates safeguards to protect members of cooperatives, while  
            allowing a cooperative to obtain a mortgage.

            Second, to obtain a BRE public report, a cooperative must  
            prepare numerous documents and forms, often with the help of  
            attorneys, accountants, and engineers.  This process can cost  
            a new cooperative $10,000-$20,000 in professional and filing  
            fees and take up to one year.  For cooperatives in which the  
            prospective residents have a preexisting business or personal  
            relationship, this bill will remove this onerous and time  
            consuming requirement through an exemption to the Subdivided  
            Lands Law.  




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           2.Undoing an important consumer protection  .  A BRE public report  
            is designed to protect consumers in two ways:  1) by ensuring  
            that a developer completes promised infrastructure and  
            establishes financing and governing structures that will  
            ensure the long-term success of the development; and 2) by  
            informing purchasers of financial and structural matters  
            related to the purchase of a unit.  This bill would undo these  
            important protections for cooperatives of less than 35 units  
            in which the prospective residents have a preexisting business  
            or personal relationship.  The bill seems to assume that  
            residents of an existing apartment building that want to  
            convert the building to a cooperative, because they know each  
            other, have some greater level of real estate experience than  
            other homebuyers and therefore do not need the oversight of  
            the BRE in setting up their cooperative.  In reality, most  
            renters have little experience in buying real estate and none  
            in setting up more complicated structures like a cooperative.   
            Moreover, precisely because of the existing relationships in  
            which peer pressure may be exerted, such a conversion among  
            existing tenants may not be an arms-length transaction among  
            independent parties.  Such conversions, like all subdivisions  
            of property, benefit from the oversight of the BRE and the  
            notice provided by a public report.  The committee may wish to  
            consider removing the Subdivided Lands Law exemption from the  
            bill to ensure adequate consumer protection.   

           3.Finding the balance on blanket encumbrances  .  Currently,  
            developers or residents cannot build or convert a cooperative  
            without a mortgage, but with a mortgage they cannot sell  
            shares.  The bill solves this classic dilemma by allowing  
            cooperatives to sell shares in a development subject to a  
            blanket encumbrance under certain conditions.  Specifically,  
            the development must satisfy one of three conditions:  1) be  
            exempt from a BRE public report; 2) maintain a specified  
            reserve account; or 3) sell shares only to "accredited  
            investors."  These conditions may not be the right ones,  
            however.  As discussed above, cooperatives should remain  
            subject to the BRE public report process.  Second, assuming  
            there is even a market for cooperative shares among accredited  
            investors, it is not clear that persons with $200,000 in  
            annual income are in a position to lose their home and  
            investment in the event of a foreclosure on the blanket  
            encumbrance.  Requiring a reserve account, on the other hand,  
            is a prudent measure to ensure that the development can meet  
            its blanket encumbrance obligation and protect shareholders  




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            from foreclosure.  But to the extent that BRE already accounts  
            for the blanket encumbrance when it reviews the development's  
            financing under the public report process (in which case it  
            may establish its own reserve requirements), it may not be  
            necessary to require a reserve for such projects in statute.   
            The committee may wish to consider allowing blanket  
            encumbrances for cooperatives under the following conditions:   
            1) when the encumbrance is accounted for in a public report,  
            or 2) when the cooperative maintains a specified reserve fund.  

          
           4.Technical amendments  :

                 On page 6, line 19 strike "11013.3" and insert  
               "11013.6".
                 Strike Section 4 from the bill.
                 On page 7, line 31 strike "11003.2" and insert "4190 of  
               the Civil Code".
                 Replace Section 6 with an amendment adding subdivision  
               (f) to Section 5100 of the Civil Code to read: "Directors  
               are not required to be elected pursuant to this article if  
               the governing documents provide that all members are  
               directors."

           1.Double referral  .  The Senate Rules Committee has referred this  
            bill to both this committee and the Judiciary Committee.
          
          Assembly Votes:
               Floor:    73-0
               Appr: 17-0
               Judic:     10-0                        
               H&CD:        7-0


          POSITIONS:  (Communicated to the committee before noon on  
          Wednesday,                                             June 12,  
          2013.)

               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 





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               OPPOSED:  None received.