BILL ANALYSIS Ó AB 596 Page 1 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. AB 596 Page 2 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. AB 596 Page 3 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. AB 596 Page 4 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." AB 596 Page 5 Analysis Prepared by: Lisa Engel / H. & C.D. / (916) 319-2085 FN: 0000436