BILL ANALYSIS Ó
AB 596
Page 1
ASSEMBLY THIRD READING
AB
596 (Daly)
As Amended May 5, 2015
Majority vote
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|Committee |Votes |Ayes |Noes |
| | | | |
| | | | |
|----------------+------+--------------------+--------------------|
|Housing |7-0 |Chau, Steinorth, | |
| | |Burke, Chiu, Beth | |
| | |Gaines, Lopez, | |
| | |Mullin | |
| | | | |
| | | | |
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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