BILL ANALYSIS
SENATE LOCAL GOVERNMENT COMMITTEE
Senator Tom Torlakson, Chair
BILL NO: AB 728 HEARING: 7/2/03
AUTHOR: Leno FISCAL: Yes
VERSION: 6/25/03 CONSULTANT: Detwiler
SUBDIVISIONS
Background and Existing Law
The Subdivision Map Act regulates the division of property,
requiring a subdivision's design and improvements to be
consistent with the local general plan. The Map Act spells
out the subdivider's duties as well as the requirements
that a city or county must follow when reviewing and
approving a proposed subdivision. The Subdivided Lands Act
is a consumer protection law that regulates the sale of
subdivisions and ensures public disclosures.
A 2002 report for the San Francisco Chamber of Commerce
contended that state laws hamper developers from getting
favorable financing for building attached housing,
particularly condominiums. Builders and lenders say that
constructing attached housing is financially riskier than
standard subdivisions. The Chamber's report argued that
statutory changes that cut the risk of building attached
housing could boost condo construction and increase
homeownership.
Proposed Law
Assembly Bill 728 makes five changes to the Subdivided
Lands Act and the Subdivision Map Act:
I. Public reports . The Subdivided Lands Act prohibits the
sale of parcels until the State Real Estate Commissioner
issues a public report ("white paper") that discloses key
information to prospective buyers. However, the Act allows
sales in planned developments, community apartment
projects, condominiums, stock cooperatives, and time-share
projects, if the Commissioner issues a conditional report
("yellow paper"). A yellow paper lasts six months but the
Commissioner can extend it for another six months after
determining that the requirements for the white paper will
be met during the renewal period. One requirement for a
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white paper is that the builder record a final subdivision
map issued under the Subdivision Map Act. If the
Commissioner doesn't issue the white paper, the subdivider
must return the buyers' deposits.
Condominium builders say that one reason that construction
loans are expensive is because they can't sign contracts
until the project is nearly complete. Because getting a
final subdivision map under the Map Act can take several
years, having a one-year conditional report isn't enough
time.
Assembly Bill 728 extends the duration of a subdivision
conditional report from six months with one six-month
additional term to three years with additional terms of six
months each.
II. Liquidated damages . A contract to sell owner-occupied
residential property can require the buyer to pay the
seller liquidated damages if the buyer fails to complete
the deal. State law says that liquidated damages up to 3%
of the purchase price are valid unless the buyer shows that
the amount was unreasonable. Liquidated damages over 3%
are invalid unless the seller shows that the amount is
reasonable.
Some lenders say that California's 3% statutory limit on
liquidated damages makes loaning money to condominium
builders risky. Other states have either higher
presumptions or none at all. If many buyers break their
sales contracts, standard subdividers can adjust their
projects. Because condo builders construct entire
projects, they can't adjust as readily when buyers back
out. Lenders say that higher liquidated damages for
condominium projects would reduce the number of broken
contracts, making financing less risky.
Assembly Bill 728 eliminates the fixed limit on liquidated
damages for the initial sale of a newly constructed
condominium, declaring that a contracted payment for
liquidated damages is valid unless the buyer shows that the
amount was unreasonable.
III. Final maps . For a minor subdivision (four or fewer
parcels), the Subdivision Map Act requires local officials'
approval of a discretionary parcel map. For a major
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subdivision (five or more parcels), the Map Act requires
the landowner to apply for a discretionary tentative map
and, after completing the conditions imposed by local
officials, for a ministerial final map.
A condominium is a set of undivided interests in common in
real property with each owner owning a separate interest in
a unit. The boundaries of these interests must appear in a
recorded final map, parcel map, or condominium map.
Condominium projects are subdivisions under the Map Act and
condo builders chafe under the Act's deadlines. Some condo
builders say that cities and counties delay issuing final
maps because they don't have a condominium plan.
Assembly Bill 728 says that a subdivision map does not need
a condominium plan. AB 728 prohibits a city or county from
approving a parcel, tentative, or final map for a
condominium project because of the absence of a condominium
plan.
IV. Deemed approved . The Subdivision Map Act requires a
local planning commission or legislative body to make a
discretionary decision on a proposed tentative map or
parcel map within 50 days after completing the necessary
environmental review documents. If the planning commission
or legislative body fails to act within this deadline, the
Map Act declares that the tentative map is deemed approved.
The legislative body's clerk must issue the approval.
Assembly Bill 728 declares that a subdivider is entitled to
receive a certificate of approval, upon request, if the
tentative map is deemed approved because of the legislative
body's inaction.
Comments
1. Risk, return, reliability . The cost of borrowing money
reflects the level of risk that lenders are willing to
endure. The riskier the prospect of repayment, the higher
the interest rate. Lending money to suburban subdividers
is relatively less risky than making loans to builders to
construct condo projects on infill lots surrounded by
NIMBYs. While there are many reasons that the market
doesn't produce enough housing --- particularly multifamily
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housing and condos --- one cause is lenders' reluctance to
inject more investment dollars into the private development
market. AB 728 encourages lenders to invest in condo
projects by reducing some of their risks. The bill allows
condo builders to raise more money from prospective buyers
and to speed along their paperwork.
2. Be aware, be very aware . AB 728 bypasses the current
statutory presumption that 3% is a reasonable amount of
liquidated damages if a real estate deal falls apart. The
bill's exemption applies only to the initial sale of a
newly constructed condominium, allowing condo builders and
buyers to negotiate their own mutually agreeable amounts.
Coupled with the bill's longer period for yellow papers,
it's possible that a condo buyer might have 5% or 10% or
more of the condo's purchase price tied up for three or
more years. And the buyer can lose that money if the
builder fails to get a white paper from the Real Estate
Commissioner. The Subdivided Lands Act is supposed to
protect consumers. The Committee may wish to consider
whether this exemption puts consumers' investments at undue
risk. Caveat emptor.
3. Too long, farewell . Conditional subdivision reports
last only for six months; 12 months if the Real Estate
Commission grants one six-month extension. AB 728 extends
the duration of these yellow papers from one year to three
years, plus any number of six-month extensions. While a
year may be too short for a yellow paper, an indefinite
duration may be too long. The Committee may wish to
consider an amendment that provides for an initial
three-year term for a conditional subdivision report plus
just one six-month extension if the Real Estate
Commissioner determines that the requirements will be met
during the renewal period.
4. Risky business . Doing away with the 3% statutory
presumption for the validity of liquidated damages for
newly-built condos shifts the risk of lending money from
the investors to the prospective buyers. As builders ask
buyers to put up more of their own money, they can borrow
less money from the banks and other lenders. Behind AB
728's shift in public policy is a shift in private sector
financing practices. The Committee may wish to consider
whether legislators should encourage condo builders to get
their operating capital from buyers or the banks.
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5. Chicken and egg . Condo builders say that San Francisco
inspection officials slow down their projects and delay the
issuance of the Real Estate Commissioner's white papers.
To get a final subdivision report requires a final
subdivision map. To get a final subdivision map requires a
condominium plan. To get a condominium plan in San
Francisco requires local inspectors to actually measure the
completed building. This custom and practice --- perhaps
unique to San Francisco --- delays the filing of the
condominium plan, the approval of the final subdivision
map, the issuance of the white paper, and the sale of new
units. AB 728 responds by reversing the current law that
requires a condominium plan before local officials can
approve the final subdivision map. If the delay exists in
just one (or even just a few) communities, the solution may
be local reforms rather changing a statewide statute. The
Committee may wish to consider removing that change from AB
728. After all, another part of the bill gives condo
builders a longer yellow paper.
6. Not just condos . A city clerk or clerk of the county
board of supervisors must issue a subdivision approval if
local officials miss the Map Act's 50-day deadline to act
on a proposed subdivision. AB 728 allows the subdivider to
request and receive this paperwork. Absent any survey or
even anecdotal evidence describing local problems, the
Committee may wish to consider removing that Map Act change
from AB 728.
Assembly Actions
Assembly Local Government Committee: 8-0
Assembly Appropriations Committee:24-0
Assembly Floor: 74-0
Support and Opposition (6/26/03)
Support : San Francisco Chamber of Commerce, California
Building Industry Association, California Mortgage Bankers
Association, Home Ownership Advancement Foundation.
Opposition : California Association of Realtors.