BILL ANALYSIS Ó
AB 596
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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:
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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).
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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
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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
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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."
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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:
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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