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