BILL ANALYSIS Ó
AB 596
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CONCURRENCE IN SENATE AMENDMENTS
AB
596 (Daly)
As Amended June 9, 2015
Majority vote
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|ASSEMBLY: |77-0 |(May 18, 2015) |SENATE: |39-0 |(July 6, 2015) |
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Original Committee Reference: H. & C.D.
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.
The Senate amendments make clear that the disclosure requirements in
the bill only apply to condominium projects.
AS PASSED BY THE ASSEMBLY, this bill required a HOA in a CID to
disclose to the owners if the CID is an approved condominium project
pursuant to FHA and VA guidelines. Specifically, this bill:
1)Required an HOA to include a statement in the annual budget
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report, on a separate piece of paper in 10-point font, disclosing
the status of the CID as a FHA-approved condominium project.
2)Required 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.
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
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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.
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.
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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."
Analysis Prepared by:
Lisa Engel / H. & C.D. / (916) 319-2085 FN: 0001141