BILL ANALYSIS Ó
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.