BILL ANALYSIS
SENATE BANKING, COMMERCE AND INTERNATIONAL TRADE
Senator Dean Florez, Chair Bill No: AB 620
Author: Leno
Amended: June 10, 2003
Hearing: July 11, 2003 Fiscal: No
SUBJECT: Real Estate Brokers
DIGEST -- WHAT THE BILL DOES
EXISTING LAW provides for the regulation of real
estate brokers pursuant to provisions of the Business
& Professions Code. Real estate brokers are licensed
and regulated by the Department of Real Estate. Real
estate brokers are entitled to arrange, service and
offer for sale a series of notes secured directly by
interests in the same real property, or sell undivided
interests in a note secured directly by real property.
These are known as "multi-lender" transactions.
Current law, specifically Business & Professions Code
(B&P Code) Sect. 10299, generally provides for various
protective restrictions to safeguard the interests of
the lenders involved in multi-lender transactions, and
imposes requirements on the real estate brokers
arranging, services and selling the interests secured
by real property. A ceiling expressed as a percentage
of the current market value of property is imposed,
beyond which brokers cannot seek to attract additional
funding. The current market value becomes the basis
for determining how much funding the brokers can
obtain from "multi-lenders".
Some of the protective provisions of current law are:
1. The real property in question must be located
in California.
2. The advertising allowed for the sale of the
notes must not infer that a transaction has been
approved by the Dept of Real Estate even if a sale
is conducted under the provisions of the existing
law.
3. The notes or interests in the real property
must be sold through a real estate broker as
principal or agent; and at the time of sale the
broker cannot have any interest in the real property
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as an owner, lessor, or developer, nor have an
contractual right to achieve any of the foregoing.
4. The notes shall not be sold to more than ten
persons (but there is no restriction on the number
of offerees).
5. The aggregate principal amount of the notes or
interests sold, along with the principal amount of
senior encumbrances shall exceed specified
percentages of the current market value of the real
property. The current market value of the property
is determined by the broker or appraiser. For
example the aggregate amount of notes sold for a
single family, owner-occupied residence cannot
exceed 80% of the current market value. For
commercial and income producing property the
percentage is 65%.
6. The B&P Code does allow the above percentages
to be exceeded when the broker determines that an
encumbrance in excess of the stated percentages is
"reasonable and prudent considering all relevant
factors".
THIS BILL creates a new category of loans referred to
as construction or rehabilitation loans, which will
not be subject to the restrictions set out above.
Subject to certain provisions, real estate brokers may
now change the accepted basis for determining the
amount of capital allowed to be raised from "current
market value", as noted above, to "current market
value plus the value of the completed project". In
order for a real estate broker to achieve additional
capital investment, he must comply with 8 safeguards:
1. An independent third party escrow account shall
be used for deposits and disbursements.
2. A partnership that is not formed specifically
for the purposes of purchasing securities offered
pursuant to Corporations Code Section 25102 shall be
counted as one person.
3. The loan shall be fully funded, with entire
loan amount deposited into escrow prior to recording
of any deeds or deeds of trust.
4. A comprehensive draw-down schedule of funds is
utilized.
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5. Disbursements from escrow are conditioned on
certification by an independent, qualified person;
i.e., licensed architect, structural engineer,
general contractor or local building inspector.
6. An appraisal is completed by a licensed
appraiser.
7. Documentation shall include a detailed business
plan of actions to be taken in event of failure of
the project.
8. The amount of the loan does not exceed $2.5
million.
FISCAL EFFECT:
Department of Real Estate states that effect is
unknown, but estimates that the full effect would be minor.
COMMENTS:
A. Purpose of the bill
Real estate brokers typically make loans under the
multi-lender law for construction and rehabilitation
projects. These loans have historically been based on the
value of properties after construction or rehabilitation
projects were completed. This bill allows that practice to
continue. The bill does include new protections for
investors/lenders participating in these projects.
This bill allows "current market value" to reflect the
value of the completed project. That is the current market
value plus the projected value. This is allowed when
certain conditions are met. Among these conditions are the
use of an independent neutral third party escrow to hold
the funds and the requirement that the loan disbursements
be based upon an independent certification that the
construction of the project meets applicable codes and
standards, and be consistent with the construction contract
and draw schedules. Facilitating the flow of investment
capital into small construction projects helps increase
available housing.
B. Background
Until 1997, Section 10299 of the B&P Code was part of
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the Corporations Code. This section, known as the
"multi-lender law" was regulated by the Department of
Corporations because the law is technically an exemption
from California securities laws. Under this law,
California real estate brokers are permitted to bring up to
10 investors together, pool their money, and make a real
estate-secured loan to a consumer or a business.
C. Arguments in support
The author notes that many private individuals invest
funds through multi-lender arrangements, believing that
real estate loans are good, safe investments that are a
prudent component of an investment portfolio. In addition
to detailed disclosure requirements which tell investors
exactly how their investment will be secured, the law
contains maximum loan to value ratios which range from a
high of 80% for owner-occupied single family residences,
down to 50% for "bare land" and down to 35% for "other real
estate".
D. Arguments in opposition
None on file.
SUPPORT AND OPPOSITION:
A. Support: California Mortgage Association
B. Opposition: None
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Consultant:John R. Drews (916) 445-6306
Date: June 9, 2003Time: 11:20AM