BILL ANALYSIS Ó AB 596 Page 1 Date of Hearing: May 13, 2015 ASSEMBLY COMMITTEE ON HOUSING AND COMMUNITY DEVELOPMENT Ed Chau, Chair AB 596 Daly - As Amended May 5, 2015 SUBJECT: Common interest developments: annual budget report. SUMMARY: Requires a homeowners association (HOA) in a common interest development (CID) to disclose to the owners if the CID is an approved condominium project pursuant to Federal Housing Administration (FHA) and Department of Veterans Affairs (VA) guidelines. Specifically, this bill: 1)Requires a HOA to include a statement in the annual budget report, on a separate piece of paper in 10 point font, disclosing the status of the CID as a FHA- approved condominium project. 2)Requires a HOA to include a statement in the annual budget report, on a separate piece of paper in 10 point font, disclosing the status of the CID as a VA- approved condominium project. EXISTING LAW: Requires an HOA to distribute an annual budget report 30 to 90 days before the end of the fiscal year that includes the following information, unless the governing documents impose more stringent standards: AB 596 Page 2 1)A pro forma operating budget showing the estimated revenue and expense on an accrual basis; 2)A summary of the HOA's reserves; 3)A summary of the reserve funding plan adopted by the board; 4)A statement as to whether the board of directors (board), consistent with the reserve funding plan, has determined or anticipates that the levy of one or more assessments will be required to repair, replace, or restore any major component or to provide for adequate reserves; 5)A statement as to how the board plans to fund the reserves to repair or replace major components; 6)A general statement describing the procedure used to calculate and establish the reserves; 7)A statement as to whether the HOA has any outstanding loans; 8)A summary of the HAO's property, general liability, earthquake, flood, and fidelity insurance policies. 9)The Assessment and Reserve Funding Disclosure Summary Form prepared pursuant to Civil Code Section 5570. (Civil Code Section 5300). AB 596 Page 3 FISCAL EFFECT: None. COMMENTS: Background : There are over 50,220 CIDs in the state that comprise over 4.8 million housing units, or approximately one quarter of the state's housing stock. CIDs include condominiums, community apartment projects, housing cooperatives, and planned unit developments. They are characterized by a separate ownership of dwelling space coupled with an undivided interest in a common property, restricted by covenants and conditions that limit the use of common area and the separate ownership interests, and the management of common property and enforcement of restrictions by a HOA. CIDs are governed by the Davis Stirling Act (the Act) as well as the governing documents of the HOA, including bylaws, declaration, and operating rules. CIDs are run by volunteer boards the members of which may have little or no experience managing real property or governing a nonprofit association and who must interpret the complex laws regulating CIDs. Boards must not only interpret the law, but enforce the restrictions and rules imposed by the governing documents and state law. CIDs are required to provide homeowners with an annual budget report thirty to ninety days before the end of the fiscal year. The annual budget report must include among other things a pro forma operating budget, a summary of the HOA's reserves, a statement of any outstanding loans, and a summary of the HOA's insurance policies. This bill would require the HOA to notify the members as part of the annual budget report as to whether or not the HOA is certified by FHA and VA. The HOA would not be AB 596 Page 4 required to be certified but rather simply notice the members yearly of the status of the certification. FHA and VA loan approval : Fifty-six percent of CIDs in the state are formed as condominiums. In order for a buyer to qualify for an FHA loan for a condominium, the entire condominium project must be certified by FHA. According to the FHA Website, "condo projects feature ownership of a portion of a property rather a single buyer owning the entire property. Such ownership requires agreements and covenants between the owners to care for common areas, address issues that can affect the entire building, and other concerns." FHA publishes guidelines to help sellers, buyers, and developers gain approval and be listed on the FHA approved list. Typically, developers apply for this certification when a condominium is first constructed and prior to selling all of the individual units. Prior to 2010, developers applied for the FHA approval prior to selling condominium units and the approval did not expire. In response to the foreclosure crisis, FHA put in place a certification process to ensure that condominiums are financially stable and managed properly. Certification now lasts for two years at which point the HOA must be re-certified. Some condominiums employ professional management companies who could apply for the FHA certification. There are also companies that an HOA can hire who will apply for the FHA or VA certification on behalf of the HOA. A preliminary search by committee staff found several companies that charged between $850 and $2000 to apply for the certification from FHA. The cost of certification, like all other expenses of an HOA, would be paid for by the owners through assessments. FHA guidelines for condominiums include the following requirements: Projects consist of two units or more. Projects must be covered by hazard and liability insurance AB 596 Page 5 and, when applicable, flood insurance. No more than 25% of the property's total floor area in a project can be used for commercial purposes. No more than 10% of the units may be owned by one investor. No more than 15% of the total units can be in arrears (more than 30 days past due) of their condominium association fee payment. At least 50% of the total units must be sold prior to endorsement of any mortgage on a unit. At least 50% of the units of a project must be owner-occupied or sold to owners who intend to occupy the units. Purpose of this bill : According to the author, "a limited number of HOAs in California are not certified by FHA. For some prospective buyers, FHA approval status serves as a type of stamp of approval, thus enhancing the value of properties within the community. Conversely, the loss of FHA approval risks driving down the value of properties that any of the current owners may wish to sell. And some real estate agents will not even show their clients HOA homes which are not FHA approved. In addition, the down payment required when a home loan is insured by FHA, generally speaking, is lower than for a conventional loan. A more favorable interest rate on these loan products may result in lower monthly payments as well. Before a qualified homebuyer can use FHA financing to purchase an individual home in an attached condominium project, the HOA board of directors for the project must apply for and receive approval for the entire project from the government entity." AB 596 Page 6 Arguments in support : The sponsor of this bill, the Orange County Business Council, states that "generally speaking, the down payment required when a home loan is insured by FHA or guaranteed by VA is lower than that for a conventional loan, and a more favorable interest rate on these loan products may result in lower monthly payments as well. Statistics show that approximately 60% of new homebuyers intend to use a FHA loan. However, before a qualified home buyer can use either FHA or VA financing to purchase an individual home in an attached condominium project, the HOA board of directors for that project must apply for and receive approval from?either FHA or VA that is being asked to insure or guarantee the loan." Arguments in opposition : The Educational Community for Homeowners (ECHO) are opposed to AB 596 because it places additional burdens on the boards of condominiums which are comprised of volunteers who find the laws governing CIDs complex and ever changing. ECHO would remove their opposition if the bill was amended to require the annual budget report to include a statement informing the owners that there are FHA and VA Web sites where they can ascertain whether or not the CID is FHA- or VA- certified but not require the listing of the Web sites in the report since those might change. REGISTERED SUPPORT / OPPOSITION: AB 596 Page 7 Support Orange County Business Council (sponsor) California Association of Realtors Opposition Educational Community for Homeowners (ECHO) Analysis Prepared by:Lisa Engel / H. & C.D. / (916) 319-2085