BILL ANALYSIS Ó
SENATE JUDICIARY COMMITTEE
Senator Noreen Evans, Chair
2013-2014 Regular Session
AB 1024 (Torres)
As Amended June 24, 2013
Hearing Date: July 2, 2013
Fiscal: Yes
Urgency: No
TH
SUBJECT
Real Property: Divided Lands
DESCRIPTION
This bill would exempt stock cooperatives and limited equity
housing cooperatives from restrictions in the Subdivided Lands
Act prohibiting the sale or leasing of lots or parcels within a
subdivision subject to a blanket encumbrance under certain
circumstances. The bill would expand the sources from which a
limited equity housing cooperative may obtain financing and
remain exempt from the Subdivided Lands Act. The bill would
also amend the election requirements of the Davis-Stirling
Common Interest Development Act to exempt developments from
having to elect members to a board of directors when the
development's governing documents provide that all members are
directors.
BACKGROUND
California's Subdivided Lands Act gives the Bureau of Real
Estate (formerly the Department of Real Estate) certain
authority over planned developments, community apartment
projects, condominiums, and housing cooperatives. Its purpose
is "to prevent fraud and misrepresentation in the marketing of
parcels of land by requiring disclosure of the financial risks
and benefits of a transaction to proposed purchasers and
lessees." (California Coastal Com. v. Quanta Investment Corp.
(1980) 113 Cal.App.3d 579, 589.) "To accomplish this, the
[Bureau of Real Estate] issues public reports based on extensive
disclosures made by the subdividers in connection with the
parcels they offer for sale or lease," and "[any] sale or lease
(more)
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[made] without providing a public report to the transferee is
prohibited." (Id.) Additionally, the Subdivided Lands Act
makes it unlawful for an owner, subdivider, or agent to sell or
lease lots or parcels within a subdivision that are subject to a
blanket encumbrance unless the purchaser or lessee of a lot or
parcel can obtain legal title to the interest free and clear of
the encumbrance. As was the case with a parallel restriction in
its predecessor statute, the Real Estate Act, the prohibition
against blanket encumbrances in the Subdivided Lands Act is
aimed at both the "prevention of fraud and sharp practices in a
type of real estate transaction peculiarly open to such abuses,"
and ensuring "protection for the innocent purchaser against loss
of his land by foreclosure of [an] underlying mortgage." (In re
Sidebotham (1938) 12 Cal.2d 434, 436.)
This bill would exempt stock cooperatives and limited equity
housing cooperatives from restrictions in the Subdivided Lands
Act prohibiting the sale or leasing of lots or parcels within a
subdivision subject to a blanket encumbrance if the following
conditions are met:
notice is provided to every prospective purchaser of an
interest in the cooperative and is included in every purchase
contract, warning of the risk that he or she could lose the
interest through foreclosure of the blanket encumbrance even
though the buyer is not delinquent in his or her payments for
the interest;
the property subject to the sale has obtained a public report
from the Bureau of Real Estate that accounts for the blanket
encumbrance; and
the governing documents for the cooperative require it to
create within one year of the sale of at least 50 percent of
the individual interests in the cooperative, and maintain
during the term of the blanket encumbrance, a financing
reserve amount equal to at least three months of the amount of
the debt service payments due on the blanket encumbrance or a
lesser amount acceptable to the Commissioner of Real Estate.
The Subdivided Lands Act also exempts limited equity housing
cooperatives from the Act's provisions if the cooperative meets
a number of conditions, including conditions concerning the
financing of construction or development costs of the real
property to be occupied by the cooperative. This bill would
expand the sources from which a limited equity housing
cooperative may obtain financing and remain exempt from the
Subdivided Lands Act. The bill would also amend the election
requirements of the Davis-Stirling Common Interest Development
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Act to exempt developments, including housing cooperatives, from
having to elect members to a board of directors when the
development's governing documents provide that all members are
directors.
CHANGES TO EXISTING LAW
Existing law , the Subdivided Lands Act, governs "Subdivided
lands" and the "subdivision" of improved or unimproved land or
lands, wherever situated within California, divided or proposed
to be divided for the purpose of sale or lease or financing,
whether immediate or future, into five or more lots or parcels.
(Bus. & Prof. Code Sec. 11000.)
Existing law states that the reference in the Subdivided Lands
Act to "subdivided lands" and "subdivision" shall include, among
other things, any stock cooperative, including any legal or
beneficial interests therein, having or intended to have five or
more shareholders, and any limited-equity housing cooperative.
(Bus. & Prof. Code Sec. 11004.5.)
Existing law states that it shall be unlawful, except as
provided, for an owner, subdivider, or agent to sell or lease
lots or parcels within a subdivision that is subject to a
blanket encumbrance unless there exists in such blanket
encumbrance or other supplementary agreement a provision which
by its terms shall unconditionally provide that the purchaser or
lessee of a lot or parcel can obtain legal title or other
interest contracted for, free and clear of such blanket
encumbrance, upon compliance with the terms and conditions of
the purchase or lease. (Bus. & Prof. Code Sec. 11013.1.)
Existing law provides that if the blanket encumbrance or
supplementary agreement does not contain a release clause as
described above, then it shall be unlawful for the owner,
subdivider, or agent to sell or lease lots or parcels within a
subdivision unless one of the following conditions is met:
the entire sum of money paid or advanced by the purchaser or
lessee of any such lot or parcel, or such portion thereof as
the Commissioner of Real Estate (Commissioner) shall determine
is sufficient to protect the interest of the purchaser or
lessee, is deposited into an escrow depository acceptable to
the Commissioner, as specified;
the title to the subdivision is held in trust under an
agreement of trust acceptable to the Commissioner until a
proper release from such blanket encumbrance is obtained;
a bond to the State of California is furnished to the
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Commissioner for the benefit and protection of purchasers or
lessees of such lots or parcels, in such amount and subject to
such terms as may be approved by the Commissioner, as
specified; or
the Commissioner provides an alternative requirement or method
deemed acceptable to protect the interest of the purchaser of
lessee. (Bus. & Prof. Code Sec. 11013.2.)
Existing law provides that a limited-equity housing cooperative
or a workforce housing cooperative trust shall be exempt from
the requirements of the Subdivided Lands Act if the
limited-equity housing cooperative or workforce housing
cooperative trust complies with certain conditions, including:
The United States Department of Housing and Urban Development,
the United States Department of Agriculture, the National
Consumers Cooperative Bank, the California Housing Finance
Agency, the Public Employees' Retirement System (PERS), the
State Teachers' Retirement System (STRS), the Department of
Housing and Community Development, or the Federal Home Loan
Bank System or any of its member institutions, alone or in any
combination with each other, or with the city, county, school
district, or redevelopment agency in which the cooperative is
located, directly finances or subsidizes at least 50 percent
of the total construction or development cost or one hundred
thousand dollars ($100,000), whichever is less, of the housing
cooperative. (Bus. & Prof. Code Sec. 11003.4.)
Existing law , the Davis-Stirling Common Interest Development
Act, establishes rules and regulations governing the operation
of a common interest development and the respective rights and
duties of a homeowner's association and its members. (Civ. Code
Sec. 4000 et seq.)
Existing law states that, notwithstanding any other law or
provision of the governing documents, elections regarding
assessments legally requiring a vote, election and removal of
directors, amendments to the governing documents, or the grant
of exclusive use of common areas, shall be held by secret ballot
in accordance with the procedures set forth in the
Davis-Stirling Common Interest Development Act. (Civ. Code Sec.
5100.)
This bill would provide that, notwithstanding prohibitions in
the Subdivided Lands Act, an individual interest in a stock
cooperative or a limited equity housing cooperative may be sold
or leased subject to a blanket encumbrance if all of the
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following conditions are met:
the notice required pursuant to Section 1133 of the Civil Code
is provided to every prospective purchaser of the interest and
is included in every purchase contract;
the property subject to the sale has obtained a public report
from the Bureau of Real Estate that accounts for the blanket
encumbrance; and
the governing documents for the association require the
association to create within one year of the sale of at least
50 percent of the individual interests in the stock
cooperative or limited-equity housing cooperative, and
maintain during the term of the blanket encumbrance, a
financing reserve amount equal to at least three months of the
amount of the debt service payments due on the blanket
encumbrance or a lesser amount acceptable to the Commissioner
of Real Estate.
This bill would provide that a limited-equity housing
cooperative or a workforce housing cooperative trust shall be
exempt from the requirements of the Subdivided Lands Act if,
alone or in any combination with other specified entities, a
state or federally chartered credit union or a state or
federally certified community development financial institution
directly finances or subsidizes at least 50 percent of the total
construction or development cost or one hundred thousand dollars
($100,000), whichever is less, of the housing cooperative.
This bill would also provide that a director shall not be
required to be elected pursuant to the Davis-Stirling Common
Interest Development Act if the governing documents of a common
interest development, including a housing cooperative, provide
that all members are directors.
COMMENT
1. Stated need for the bill
The author writes:
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Existing law prohibits a recording of a blanket encumbrance on
a cooperative unless specified requirements are met. As a
result it is very hard to finance a cooperative because
lenders are not interested in lending on individual units in
the cooperative. This bill allows [an interest in a stock
cooperative or limited equity housing cooperative to be sold
with] a blanket encumbrance [subject to certain conditions,
including the preparation of] . . . a public report [and the
establishment of] . . . a reserve.
In some cases the bylaws of the governing documents of a
cooperative require the members to all sit on the board of
directors. The state law governing CIDs [Common Interest
Developments] requires the homeowners association [to] hold an
election for the board of director[s]. This is unnecessary if
all members are automatically board members. This bill states
that if the bylaws require all members to be board members in
a CID then you are not required to hold an election.
2. Housing cooperatives in California
A housing cooperative is an umbrella term that describes a type
of legal corporation formed by residents of a particular
building or area who, through the corporation, own and control
the building[s] in which they live. In general, housing
cooperatives are formed to provide affordable housing for their
members. They do this by charging members only the amount
required to run the cooperative (including reserve and emergency
expenses), and therefore operate on an at-cost or not-for-profit
basis. While affordable housing is the most common reason
housing cooperatives form, scholars note that they may have a
secondary goal of preventing the displacement of residents,
promoting economic development, preserving historical buildings,
or protecting the character of neighborhoods threatened with
gentrification. (Dewey Bandy, Characteristics and operational
performance of California's permanent Housing Cooperatives
[as of
June 27, 2013] p. 1.)
Members of a housing cooperative typically buy shares in their
cooperative corporation and pay a monthly amount to cover the
operating expenses of maintaining the land, buildings, and
common areas which the cooperative owns. Ownership of a share
in the cooperative normally guarantees a member an exclusive
right to occupy a particular dwelling unit in the community
owned by the cooperative. Use of the unit may be governed by a
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proprietary lease or occupancy agreement entered into with the
corporation. (Northcountry Cooperative Development Fund,
Housing Cooperatives: An Accessible and Lasting Tool for
Homeownership [as of June 27, 2013].)
Housing cooperatives are usually self-governing -- the
membership enacts bylaws and elects from among themselves a
board of directors to oversee the cooperative's day to day
operations. The board of directors usually must approve the
purchase and sale of shares in the cooperative, thereby
controlling who can join the community. With some exceptions, a
new member typically borrows all or part of the share purchase
price from a private lender, which is secured by his or her
individual interest in the cooperative. (Northcountry
Cooperative Development Fund, Housing Cooperatives: An
Accessible and Lasting Tool for Homeownership
[as of June 27, 2013].)
Housing cooperatives in California come in many forms, including
limited equity housing cooperatives, stock or market rate
cooperatives, manufactured home park cooperatives, and senior
housing cooperatives. A limited equity housing cooperative is
formed primarily to offer permanently affordable home ownership
opportunities for low and moderate income individuals. These
cooperatives are typically financed with a combination of
private and public funds, and price restrictions are put on the
sale of shares in order to preserve affordability for future
purchasers. Stock cooperatives, in contrast, operate in the
private market and membership shares are sold at full market
value. Much like conventional real estate, a share's sale price
is determined by the market, allowing for the potential
accumulation or loss of equity by the cooperative's members.
(California Center for Cooperative Development, Housing
Cooperatives [as
of June 27, 2013].)
Manufactured home park cooperatives allow members to privately
own their own manufactured home, while the land underneath the
home, utility systems, and all common areas are owned by the
cooperative. In contrast to a condominium where an owner holds
title to his or her dwelling unit in fee simple, the real
property of a manufactured home park cooperative (like all
cooperatives) is owned by the cooperative corporation, and
shareholders are granted the right to occupy a space for their
home. Manufactured home park cooperatives can be organized as
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either stock cooperatives or limited equity cooperatives.
Finally, senior housing cooperatives are cooperatives designed
specifically to meet the particular needs of their members.
These cooperatives usually have established age restrictions and
offer various degrees of graduated care. (California Center for
Cooperative Development, Housing Cooperatives
[as of June 27,
2013].)
3. Prohibition on blanket encumbrances
As noted above, the Subdivided Lands Act contains a general
prohibition on selling or leasing subdivided lands, including
interests or shares in a housing cooperative, subject to a
blanket encumbrance. If an interest is sold with such a blanket
encumbrance, the sale or lease instrument must "include a
release clause so that purchasers of lots or parcels within the
subdivision can obtain title to their lots or parcels free of
the blanket lien upon compliance with the terms and conditions
of their purchase agreement." (Drake v. Martin (1994) 30
Cal.App.4th 984, 992.) This prohibition acts as a consumer
safeguard, ensuring that "innocent purchaser[s] [are protected]
against loss of [their] land by foreclosure of the underlying
mortgage." (In re Sidebotham (1938) 12 Cal.2d 434, 436.) The
Act does permit exceptions to this general prohibition when the
parties take special precautions to protect the financial
interest of a purchaser or lessee, including: placing the money
paid by the purchaser or lessee in an escrow account until a
release from the blanket encumbrance is obtained or the
underlying encumbrance is resolved; placing title to the
subdivision in trust until a release from the blanket
encumbrance is obtained; or furnishing a bond to the state in
such an amount so as to protect the individual interests of
purchasers or lessees until the blanket encumbrance is released
or otherwise extinguished. In each exception, the Act imposes
strict measures to ensure that a purchaser or lessee's interest
is protected from the risk of default by the subdivider or
developer on the underlying encumbrance.
The proponents of this bill argue that this restriction is an
unnecessary regulatory barrier that stymies the development of
housing cooperatives in the state. According to the sponsor,
the California Center for Cooperative Development, "[t]he
California Subdivided Lands Act prohibits the sale of housing
cooperative shares when the units are subject to a mortgage
secured by the entire property, which has the effect of banning
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housing cooperatives in California, because most cooperatives
finance the purchase of a building with a single blanket
mortgage." Absent this prohibition in the Act, a blanket
mortgage could be used to purchase, build or rehabilitate a
building, and part of each member's monthly payment to the
cooperative could be used to retire the blanket mortgage.
The Committee should note that this bill represents a departure
from existing law concerning exceptions to the prohibition on
blanket encumbrances. Instead of requiring a developer to take
measures to protect the financial interests of purchasers and
lessees of interests in subdivided lands, this bill would shift
the loss following default more onto the purchaser. It would
permit the sale or lease of an encumbered interest in a housing
cooperative so long as the prospective purchaser receives a
clear and specific notice of the risks of buying a share subject
to a blanket encumbrance. Specifically, it would require every
purchase agreement to contain the following acknowledgment:
BUYER/LESSEE IS AWARE OF THE FACT THAT THE LOT, PARCEL, OR
UNIT WHICH HE OR SHE IS PROPOSING TO PURCHASE OR LEASE IS
SUBJECT TO A DEED OF TRUST, MORTGAGE, OR OTHER LIEN KNOWN AS A
"BLANKET ENCUMBRANCE".
IF BUYER/LESSEE PURCHASES OR LEASES THIS LOT, PARCEL, OR UNIT,
HE OR SHE COULD LOSE THAT INTEREST THROUGH FORECLOSURE OF THE
BLANKET ENCUMBRANCE OR OTHER LEGAL PROCESS EVEN THOUGH
BUYER/LESSEE IS NOT DELINQUENT IN HIS OR HER PAYMENTS OR OTHER
OBLIGATIONS UNDER THE MORTGAGE, DEED OF TRUST, OR LEASE.
(Civ. Code Sec. 1133(a).)
This bill would also require a developer to provide each
purchaser with a copy of a public report from the Bureau of Real
Estate that accounts for the blanket encumbrance. Additionally,
it would mandate that the governing documents for the
cooperative require the creation within one year of the sale of
at least 50 percent of the individual interests in the stock
cooperative or limited-equity housing cooperative a financing
reserve amount equal to at least three months of the amount of
the debt service payments due on the blanket encumbrance,
maintained for the duration of the encumbrance. Once it becomes
operational and funded, this financial reserve could help
insulate individual shareholders from the consequences of
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default on a blanket encumbrance by providing the cooperative
with a stable, limited-term source of revenue for making
payments toward the blanket obligation. However, this reserve
funding mechanism still places the burden on shareholders (as
opposed to a developer or subdivider) to guard against the risk
of default, and, unlike the existing exceptions in the Act,
would not necessarily be operational or funded when the first
purchaser or lessee executes a purchase or lease agreement.
4. Expansion of permissible lenders
Under existing law, limited-equity housing cooperatives and
workforce housing cooperative trusts are exempt from the
Subdivided Lands Act if, among other things, the United States
Department of Housing and Urban Development, the United States
Department of Agriculture, the National Consumers Cooperative
Bank, the California Housing Finance Agency, the Public
Employees' Retirement System (PERS), the State Teachers'
Retirement System (STRS), the Department of Housing and
Community Development, or the Federal Home Loan Bank System or
any of its member institutions, alone or in any combination with
each other, or with the city, county, school district, or
redevelopment agency in which a cooperative is located, directly
finance or subsidize at least 50 percent of the total
construction or development cost or one hundred thousand dollars
($100,000), whichever is less, of the housing cooperative.
(Bus. & Prof. Code Sec. 11003.4.) This bill would expand the
sources from which a housing cooperative may obtain financing
and remain exempt from the Subdivided Lands Act to include state
or federally chartered credit unions and state or federally
certified community development financial institutions. The net
effect of this change would likely be to increase the total
amount of funds available in California for financing the
development of housing cooperatives, thereby increasing home
ownership opportunities for low and middle income individuals
and families. The Committee should note, however, that such an
expansion would add non-governmental entities to the list of
eligible financers, thereby shifting some of the decision-making
power over the creation of housing cooperatives under this
section of the Act to the private sector.
5. Changes to Davis-Stirling Act election requirements
This bill would also exempt common interest developments,
including housing cooperatives, from having to follow the
procedures for electing members to a governing board of
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directors pursuant to the Davis-Stirling Common Interest
Development Act if the governing documents of the development
provide that all members are automatically directors. This
exemption seems to be a sound method of relieving entities like
housing cooperatives from having to try to comply with election
procedures that don't really apply to the governance structure
of their communities. However, stakeholders have noted that
there may be cases where a share in a cooperative is held
jointly by two or more people (e.g. spouses who have joint
ownership), but only one person can serve as a director
representing the interest of their share. To address this
problem, the author offers the following amendment:
Author's amendment :
On page 9, lines 9-11, strike the existing text and replace
it with the following:
"(f) Directors shall not be required to be elected pursuant
to this article if the governing documents provide that one
member from each separate interest is a director."
6. Recent amendments concerning "Public Reports"
Staff notes that, before the amendments taken on June 24, 2013,
this bill would have exempted stock cooperatives and community
apartment projects from the obligation of having to obtain a
public report from the Bureau of Real Estate prior to offering
interests in the cooperative for sale or lease to members of the
public. Generally, before marketing new subdivisions in
California, a subdivider must obtain a public report from the
Bureau of Real Estate. According to the Bureau:
Public reports contain information of vital importance to
prospective buyers including covenant[s], conditions and
restrictions which govern the use of property, costs and
assessments for maintaining homeowners' associations and
common areas, and other material disclosures. . . Public
reports are a critical disclosure document which should be
read and understood by any home purchaser considering buying a
home in a new subdivision . . . Prior to the issuance of the
public report, subdividers must file an application with the
[Bureau] and submit documents supporting the representations
made in the application. If improvements to the subdivision
are not complete at the time the application is filed, the
subdivider must also submit evidence that adequate financial
arrangements have been made for their completion. (Public
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Reports
[as of June 25, 2013].)
As amended, this bill has eliminated all provisions that would
have altered existing law concerning a subdivider's obligation
to obtain a public report and provide copies of the report to
prospective purchasers and lessees.
7. Technical amendments
The author offers the following technical amendments:
Author's amendment :
On page 7, line 36, following "purchaser" add the phrase
"and lessee"
On page 7, line 37, following "purchase" add the phrase
"and lease"
On page 8, line 1, following "sale" add the phrase "or
lease"
On page 8, line 3, strike "encumberance" and replace it
with "encumbrance"
Support : Bay Area Community Land Trust; East Bay Cooperative
Housing Coalition; San Francisco Community Land Trust;
Sustainable Economies Law Center; Walnut House Cooperative; 14
individuals
Opposition : None Known
HISTORY
Source : California Center for Cooperative Development
Related Pending Legislation : None Known
Prior Legislation :
AB 1246 (Jones, Chapter 520, Statutes of 2009) revised the
definition of a "limited-equity housing cooperative" to also
apply to a "workforce housing cooperative trust." This bill
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established the manner in which a workforce housing cooperative
trust is organized and operated, and exempted a workforce
housing cooperative trust from provisions governing the
regulation of subdivided land if, among other organizations, the
Federal Home Loan Bank System or any of its member institutions
directly finance or subsidize at least 50% of the total
construction or development cost or $100,000, whichever is less,
of the cooperative.
AB 2052 (Haynes, 2006) would have enacted the California New
Market Venture Capital Program Act. This bill would have
declared the intent of the Legislature to facilitate free market
growth in low-income neighborhoods and close inter-generational
wealth gaps among economically disadvantaged groups by creating
jobs, growing small businesses, building affordable housing, and
revitalizing low-income neighborhoods. This bill died in the
Assembly Committee on Jobs, Economic Development, & the Economy.
AB 2511 (Jones, Chapter 888, Statutes of 2006) made a number of
changes to state law to promote the development of affordable
housing and prevent delays in processing applications for
development projects that include a housing element.
SB 619 (Ducheny, Chapter 793, Statutes of 2003) made several
changes to laws related to the development of affordable housing
by streamlining the housing approval process and authorizing
awards of attorney's fees and costs to prevailing parties in
actions against local governments for alleged failure to comply
with affordable housing requirements. This bill prohibited
discrimination against multifamily housing in zones designated
for multifamily housing. This bill also specified required
procedures to be followed by the Department of Housing and
Community Development; required multifamily residential housing
to be permitted on any parcel zoned for multifamily housing if
specifications are met; clarified the meaning of and
requirements for "mixed use" land; and clarified the criteria
for awarding and administering CalHome funds.
AB 369 (Dutra, Chapter 237, Statutes of 2001) authorized a
court, when it finds that a local agency disapproved or
conditioned a project rendering it infeasible for the
development of housing for very low-, low-, or moderate-income
households without making findings supporting its decision as
required, to award attorney's fees and costs in a lawsuit
challenging the disapproval or conditions, except under
extraordinary circumstances where the court finds that awarding
fees would not further the purposes of the statute.
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AB 2786 (Bates, 2000) would have required that all unclaimed
money, including unclaimed money from a deceased person's estate
that is currently escheated to the state, be deposited in the
Housing Rehabilitation Loan Fund. The fund would have been used
for the construction, rehabilitation, or acquisition and
rehabilitation of multifamily rental housing developments for
elderly persons or households. This bill was vetoed by Governor
Davis.
Prior Vote :
Senate Committee on Transportation and Housing (Ayes 10, Noes 0)
Assembly Floor (Ayes 73, Noes 0)
Assembly Committee on Appropriations (Ayes 17, Noes 0)
Assembly Committee on the Judiciary (Ayes 10, Noes 0)
Assembly Committee on Housing and Community Development (Ayes 7,
Noes 0)
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