BILL ANALYSIS Ó SENATE JUDICIARY COMMITTEE Senator Hannah-Beth Jackson, Chair 2015-2016 Regular Session AB 905 (Beth Gaines) Version: February 26, 2015 Hearing Date: June 9, 2015 Fiscal: Yes Urgency: No TH SUBJECT Time-shares: Public Report: Real Property Inspection DESCRIPTION The Vacation Ownership and Time-share Act of 2004 requires a person who creates a time-share plan or who is in the business of selling time-share interests, to prepare, for issuance by the Real Estate Commissioner, a public report that discloses certain facts concerning the time-share. Existing law requires those who create or sell time-shares to provide a copy of the public report in writing to each purchaser of a time-share interest in a time-share plan at the time of purchase. The Act also requires those who offer a purchaser the opportunity to subscribe to, or become a member of, an exchange program, which is a method, arrangement, or procedure for the voluntary exchange of time-share interests or other property interests, to provide the purchaser with specified disclosures in writing. This bill would modify the Act to provide that required copies of public reports pertaining to time-share interests and required copies of disclosures pertaining to exchange programs may be provided in a digital format at the discretion of the purchaser. This bill would also exempt licensed real estate brokers or salespersons from the duty to conduct a reasonably competent and diligent visual inspection of a time-share property and to disclose all facts materially affecting the value or desirability of the property to a prospective purchaser when, as a condition of transfer, the prospective purchaser would receive a copy of the public report, provided the property has not been previously occupied. AB 905 (Beth Gaines) Page 2 of ? BACKGROUND Time-shares, or vacation ownerships, are terms that generally describe a system where owners occupy a property for short periods of time each year while on vacation. This contrasts with more traditional common interest developments, like condominiums and residential subdivisions, which are usually occupied year-round. The regulation of timeshares began in earnest in 1981 when the industry was widely perceived as being prone to high-pressure sales tactics and rampant consumer fraud (an era now half-jokingly referred to as the "crime-share" days). Stringent state regulations for time-shares were built into the Subdivided Lands Law that regulated common interest developments. Although time-share regulations and references are now found throughout state law, they are now principally found in the Vacation Ownership and Time-share Act of 2004. (Bus. & Prof. Code Sec. 11210 et seq.) Under current law, time-shares are regulated by the Bureau of Real Estate (BRE), which has a broad responsibility to ensure that purchasers of regulated time-shares, both in-state and out-of-state, receive everything that they bargained for when purchasing their interest in a time-share plan. Time-share interests regulated by BRE fall into two basic categories, based on whether participation in the time share results in the conveyance of an interest in real property. The first category of regulated time-share interests includes those where a right of occupancy in a time-share property is coupled with a conveyance of an estate in real property, which is typically transferred to the purchaser by grant deed. The second involves time-share interests based on purchase agreements between sellers and buyers that do not involve the conveyance of an interest in real property. These purchase agreements take many different forms, such as granting membership in a corporation along with a time-limited license for exclusive use of a particular property. BRE's oversight of time-share interests is provided primarily through the creation of a "public report," which must be issued to each purchaser before the sale of an interest in a time-share plan. The purpose of a public report is "to prevent fraud and misrepresentation in the marketing of parcels of land by requiring disclosure of the financial risks and benefits of a transaction to proposed purchasers and lessees." (California AB 905 (Beth Gaines) Page 3 of ? Coastal Com. v. Quanta Investment Corp. (1980) 113 Cal.App.3d 579, 589.) The Vacation Ownership and Time-share Act of 2004 requires the creation of this public report, which encompasses most of the major elements of a time-share purchase (property description, amenities, real estate disclosures, costs and escrow, maintenance fees and assessments, management and local governance, rescission, liability, and a host of other matters). BRE oversees developer compliance with regulations governing the creation of time-shares, as well those related to advertising and sales of time-share interests, but the California Attorney General bears the ultimate responsibility to ensure the law is enforced. The Vacation Ownership and Time-share Act of 2004 also governs the creation and sale of interests in "exchange programs," which are contractual arrangements that facilitate voluntary exchange of time-share interests, such as allowing the owner of a time-share interest to trade use of time owned in one time-share plan for use of time at another property. The act requires those who offer purchasers the opportunity to subscribe to or become a member of an exchange program to provide specified disclosures about the exchange program, including disclosures about the program's membership and governance. This bill, sponsored by the American Resort Development Association, would authorize developers and sellers of time-share interests to provide time-share public reports and disclosures pertaining to exchange programs in a digital format at the discretion of the purchaser. This bill would also relieve licensed real estate brokers and salespersons of the duty to conduct a reasonably competent and diligent visual inspection of a previously unoccupied time-share interest offered for sale, and to disclose to a prospective purchaser all facts materially affecting the value or desirability of the property that an investigation would reveal, when the transfer of the time-share interest would require the seller to provide a public report. CHANGES TO EXISTING LAW 1.Existing law , the Vacation Ownership and Time-share Act of 2004, regulates the creation and sale of time-share interests in a time-share plan, and the creation and operation of exchange programs that facilitate the voluntary exchange of time-share interests. (Bus. & Prof. Code Sec. 11210 et seq.) AB 905 (Beth Gaines) Page 4 of ? Existing law provides that any person who, to any individual located in the state, sells, offers to sell, or attempts to solicit prospective purchasers to purchase a time-share interest, or any person who creates a time-share plan with an accommodation in the state, shall register the time-share plan with the Commissioner of Real Estate, unless the time-share plan is otherwise exempt. (Bus. & Prof. Code Sec. 11226 (a).) Existing law provides that, when registering a time-share plan, the developer of a time-share plan shall provide the Commissioner with, among other things, a public report that complies with the requirements of the Vacation Ownership and Time-share Act of 2004. (Bus. & Prof. Code Sec. 11226 (c).) Existing law provides that a developer shall prepare, for issuance by the Commissioner, a public report that shall fully and accurately disclose those facts concerning the time-share developer and time-share plan that are required by the Vacation Ownership and Time-share Act of 2004 or by regulation. (Bus. & Prof. Code Sec. 11234.) Existing law provides that the developer shall provide the public report to each purchaser of a time-share interest in a time-share plan at the time of purchase. Existing law specifies the public report shall be in writing and dated and shall require the purchaser to certify in writing the receipt thereof. Existing law also specifies the information required to be contained within a public report. (Bus. & Prof. Code Sec. 11234.) Existing law provides that public reports for a single site and those component sites of a specific time-share interest multisite time-share plan that are offered in this state shall include the following: the name and address of the developer and the type of time-share plan being offered and the name and address of the time-share project; a description of the existing or proposed accommodations, including the type and number of time-share interests in the accommodations, and if the accommodations are proposed or not yet complete or fully functional, an estimated date of completion; the number of accommodations and time-share interests, expressed in periods of seven-day use availability or other AB 905 (Beth Gaines) Page 5 of ? time increments applicable to the time-share plan, committed to the multisite time-share plan, and available for use by purchasers and a representation about the percentage of useable time authorized for sale, and if that percentage is 100 percent, then a statement describing how adequate periods of time for maintenance and repair will be provided; a description of any existing or proposed amenities of the time-share plan and, if the amenities are proposed or not yet complete or fully functional, the estimated date of completion; the extent to which financial arrangements have been made for the completion of any incomplete, promised improvements; a description of the duration, phases, and operation of the time-share plan; the name and principal address of the managing entity and a description of the procedures, if any, for altering the powers and responsibilities of the managing entity and for removing or replacing it; the current annual budget, along with the projected assessments and a description of the method for calculating and apportioning the assessments among purchasers, all of which shall be attached as an exhibit to the public report; any initial or special fee due from the purchaser at closing together with a description of the purpose and the method of calculating the fee; a description of any financing offered by or available through the developer; a description of any liens, defects, or encumbrances on or affecting the title to the time-share interests; a description of any bankruptcies, pending civil or criminal suits, adjudications, or disciplinary actions of which the developer has knowledge, that would have a material effect on the developer's ability to perform its obligations; any current or expected fees or charges to be paid by time-share purchasers for the use of any amenities related to the time-share plan; a description and amount of insurance coverage provided for the protection of the purchaser; the extent to which a time-share interest may become subject to a tax lien or other lien arising out of claims against purchasers of different time-share interests; a statement disclosing any right of first refusal or AB 905 (Beth Gaines) Page 6 of ? other restraint on the transfer of all or any portion of a time-share interest; a statement disclosing that a deposit made in connection with the purchase of a time-share interest shall be held by an escrow agent until expiration of any right to cancel the contract and that a deposit shall be returned to the purchaser if he or she elects to exercise his or her right of cancellation, as specified; a statement that the assessments collected from the purchasers will be kept in a segregated account separate from the assessments collected from the purchasers of other time-share plans managed by the same managing entity, along with a statement identifying the location of the account and a disclosure of the rights of owners to inspect the records pertaining to their accounts; if the time-share plan provides purchasers with the opportunity to participate in an exchange program, a description of the name and address of the exchange company and the method by which a purchaser accesses the exchange program; any other information that the developer, with the approval of the commissioner, desires to include in the public report; and any other information reasonably requested by the commissioner. (Bus. & Prof. Code Sec. 11234.) Existing law establishes additional disclosures for public reports for specific time-share interest multisite time-share plans and for nonspecific time-share interest multisite time-share plans. (Bus. & Prof. Code Sec. 11234.) Existing law provides that if a developer offers a purchaser the opportunity to subscribe to or to become a member of an exchange program, or if an exchange company offers directly to the purchaser the opportunity to subscribe to or become a member of an exchange company, the developer or exchange company shall provide to the purchaser in writing all of the following information prior to or concurrently with the execution of a contract or subscription for membership in the exchange program: the name and address of the exchange company; the names of all officers, directors, and shareholders of the exchange company; whether the exchange company or any of its officers or directors have any legal or beneficial interest in any AB 905 (Beth Gaines) Page 7 of ? developer or managing entity for any time-share plan participating in the exchange program and, if so, the identity of the time-share plan and the nature of the interest; a copy of the form of the contract between the purchaser and the exchange company, along with a statement that the purchaser's contract with the exchange company is a contract separate and distinct from the purchaser's contract with the seller of time-share interests; whether the purchaser's participation in the exchange program is dependent upon the continued affiliation of the applicable time-share plan with the exchange program; whether the purchaser's participation in the exchange program is voluntary; a fair and accurate description of the terms and conditions of the purchaser's contractual relationship with the exchange program and the procedure by which changes thereto may be made; a fair and accurate description of the procedures necessary to qualify for and effectuate exchanges; a fair and accurate description of all limitations, restrictions, and priorities employed in the operation of the exchange program, including, but not limited to, limitations on exchanges based on seasonality, accommodation size, or levels of occupancy, expressed in conspicuous type. If those limitations, restrictions, or priorities are not uniformly applied by the exchange company, the information shall include a clear description of the manner in which they are applied; whether exchanges are arranged on a space available basis and whether any guarantees of fulfillment of specific requests for exchanges are made by the exchange company; whether and under what circumstances an owner, in dealing with the exchange program, may lose the right to use and occupy an accommodation of the time-share plan during a reserved use period with respect to any properly applied for exchange without being provided with substitute accommodations by the exchange program; the fees or range of fees for participation by owners in the exchange program, a statement of whether any such fees may be altered by the exchange company and the circumstances under which alterations may be made; the name and address of the site of each accommodation included within a time-share plan participating in the exchange program; AB 905 (Beth Gaines) Page 8 of ? the number of accommodations in each time-share plan that are available for occupancy and that qualify for participation in the exchange program, expressed within the following numerical groups: 1-5; 6-10; 11-20; 21-50; and 51 and over; the number of currently enrolled owners for each time-share plan participating in the exchange program, expressed within the following numerical groups: 1-100; 101-249; 250-499; 500-999; and 1,000 and over; and a statement of the criteria used to determine those owners who are currently enrolled with the exchange program; the disposition made by the exchange company of use periods deposited with the exchange program by owners enrolled in the exchange program and not used by the exchange company in effecting exchanges; and the following information for the preceding calendar year, which shall be independently audited by a certified public accountant in accordance with the standards of the Accounting Standards Board of the American Institute of Certified Public Accountants and reported annually no later than August 1 of each year: o the number of owners currently enrolled in the exchange program; o the number of time-share plans that have current affiliation agreements with the exchange program; o the percentage of confirmed exchanges, which is the number of exchanges confirmed by the exchange program divided by the number of exchanges properly applied for, together with a complete and accurate statement of the criteria used to determine whether an exchange request was properly applied for; o a statement in conspicuous type to the effect that the percentage described above is a summary of the exchange requests entered with the exchange program in the period reported and that the percentage does not indicate the probabilities of an owner's being confirmed to any specific choice or range of choices; o the number of use periods for which the exchange program has an outstanding obligation to provide an exchange to an owner who relinquished a use period during a particular year in exchange for a use period in any future year; and o the number of exchanges confirmed by the exchange program during the year. (Bus. & Prof. Code Sec. 11216.) AB 905 (Beth Gaines) Page 9 of ? This bill would authorize a developer to provide a public report required by the Vacation Ownership and Time-share Act of 2004, as well as any disclosures pertaining to an exchange program, to a purchaser in writing or in a digital format at the discretion of the purchaser. 1.Existing law provides that it is the duty of a real estate broker or salesperson to a prospective purchaser of residential real property, as defined, to conduct a reasonably competent and diligent visual inspection of the property offered for sale and to disclose to that prospective purchaser all facts materially affecting the value or desirability of the property that an investigation would reveal, and to make other specified disclosures about the property and transaction, if that broker has a written contract with the seller to find or obtain a buyer or is a broker who acts in cooperation with that broker to find and obtain a buyer. (Civ. Code Sec. 2079 et seq.) Existing law specifies that the duty of a real estate broker or salesperson to conduct a reasonably competent and diligent visual inspection of a property does not apply to transfers which are required to be preceded by the furnishing, to a prospective transferee, of a copy of a public report pursuant to Section 11018.1 of the Business and Professions Code and transfers which can be made without a public report pursuant to Section 11010.4 of the Business and Professions Code, unless the property has been previously occupied. (Civ. Code Sec. 2079.6.) This bill would additionally provide that the duty of a real estate broker or salesperson to conduct a reasonably competent and diligent visual inspection of a property and to provide specified disclosures about the property and transaction does not apply to transfers which are required to be preceded by the furnishing, to a prospective transferee, of a copy of a public report pursuant to Section 11234 of the Business and Professions Code pertaining to time-share plans, unless the property has been previously occupied. COMMENT 1.Stated need for the bill The author states: AB 905 (Beth Gaines) Page 10 of ? Under existing law, purchasers of timeshares must be provided an extensive public report on the development. Existing law also mandates that purchasers of timeshare exchange program[s] be given detailed information regarding the program . . . In this modern and increasingly paperless world, many consumers would prefer not to get these sometimes bulky disclosures in paper form. AB 905 allows the disclosures to be made electronically - at the discretion of the purchaser. It also replaces language that was inadvertently left out of previous timeshare legislation. In 2004, a rewrite of the timeshare law (AB 2252 - Montanez) deleted the mandated timeshare report from [Business and Professions Code] Section 11018.1 and placed an expanded report requirement in [a] new section -- [Business and Professions Code] Section 11234. However, Civil Code Section 2079.6 was never amended to reflect that change. 2.Providing Disclosures Electronically This bill would explicitly authorize developers and sellers of time-share interests to provide copies of a time-share's public report and required disclosures about time-share exchange programs to prospective purchasers electronically at the purchaser's discretion. The ability to receive public reports and other statements disclosing the terms and conditions of a time-share purchase electronically at the purchaser's option would seem to give consumers greater control over how they receive these rather lengthy disclosures. Some consumers may be more likely to read the disclosures if they are presented in electronic format, whereas others might find them easier to ignore. However, since this bill would leave it to the consumer to decide what format to receive these materials in, the bill is unlikely to undermine existing disclosure requirements and may arguably improve the disclosure process. Staff notes that the Legislature has previously authorized consumers to receive certain real estate disclosures and notices electronically, including under the Davis-Stirling Common Interest Development Act, which allows homeowners to receive documents from a homeowners association by electronic delivery if the recipient has consented, in writing, to that method of delivery. (Civ. Code Sec. 4040.) This bill would expand to time-share interests the existing practice of providing certain real estate disclosures electronically. 3.Eliminating Duty to Inspect and Disclose AB 905 (Beth Gaines) Page 11 of ? This bill would also exempt licensed real estate brokers or salespersons from the duty to conduct a reasonably competent and diligent visual inspection of a time-share property and to disclose all facts materially affecting the value or desirability of the property to a prospective purchaser when, as a condition of transfer, the prospective purchaser would receive a copy of the public report, provided the property has not been previously occupied. Normally, a licensed real estate professional is duty-bound to properly inspect and advise their client of the conditions of a property the client is considering purchasing. This inspection is typically done alongside other specialized inspections, such as of a roof or a plumbing system, during the final phases of a real estate transaction. It is intended to help ensure that the purchaser of real property understands what he or she is purchasing. However, relieving licensed real estate brokers or salespersons from the duty to conduct visual inspections of time-share properties that have not been previously occupied and are the subject of public reports would remove an arguably unnecessary obligation currently imposed on licensees. Having not been previously occupied, these properties are less likely to have characteristics affecting the value or desirability of the property that would be revealed during a visual inspection. For these types of properties, a public report is likely to be more objective, more comprehensive, and a better source for evaluating the value or desirability of a property than a visual inspection conducted by a licensee. Support : None Known Opposition : None Known HISTORY Source : American Resort Development Association; Resort Owner's Coalition Related Pending Legislation : AB 634 (Calderon, 2015) would amend the Vacation Ownership and Time-share Act of 2004 to prohibit a time-share owner's association from publishing its list of owners or providing a copy of the list to any time-share interest owner or to any third party, or from using or selling the list for commercial purposes, except to accomplish AB 905 (Beth Gaines) Page 12 of ? legitimate association business, as defined. This bill is pending in the Senate Judiciary Committee. Prior Legislation : AB 2252 (Montanez, Ch. 697, Stats. 2004) consolidated and revised the body of time-share vacation property law, streamlined the regulatory approval process of time-share plans, and added new consumer protections and disclosures to create the Vacation Ownership and Time-share Act of 2004. Prior Vote : Assembly Floor (Ayes 77, Noes 0) Assembly Appropriations Committee (Ayes 17, Noes 0) Assembly Business and Professions Committee (Ayes 14, Noes 0) **************