BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                       AB 596


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          ASSEMBLY THIRD READING


          AB  
          596 (Daly)


          As Amended  May 5, 2015


          Majority vote


           ----------------------------------------------------------------- 
          |Committee       |Votes |Ayes                |Noes                |
          |                |      |                    |                    |
          |                |      |                    |                    |
          |----------------+------+--------------------+--------------------|
          |Housing         |7-0   |Chau, Steinorth,    |                    |
          |                |      |Burke, Chiu, Beth   |                    |
          |                |      |Gaines, Lopez,      |                    |
          |                |      |Mullin              |                    |
          |                |      |                    |                    |
          |                |      |                    |                    |
           ----------------------------------------------------------------- 


          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 an 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. 









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          2)Requires an 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.  


          FISCAL EFFECT:  None 


          COMMENTS:  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  
          an HOA.  CIDs are governed by the Davis-Stirling 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 30 to 90 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 required to be  
          certified but rather simply notice the members yearly of the  
          status of the certification. 








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          FHA and VA loan approval:  56% 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 Web site, "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 $2,000 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: 


          1)Projects consist of two units or more.
          2)Projects must be covered by hazard and liability insurance and,  
            when applicable, flood insurance. 










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          3)No more than 25% of the property's total floor area in a project  
            can be used for commercial purposes.  


          4)No more than 10% of the units may be owned by one investor.  


          5)No more than 15% of the total units can be in arrears (more than  
            30 days past due) of their condominium association fee payment.   



          6)At least 50% of the total units must be sold prior to  
            endorsement of any mortgage on a unit. 


          7)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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          Analysis Prepared by:                                               
                          Lisa Engel / H. & C.D. / (916) 319-2085  FN:  
          0000436