BILL ANALYSIS
AB 1246
Page 1
Date of Hearing: April 29, 2009
ASSEMBLY COMMITTEE ON HOUSING AND COMMUNITY DEVELOPMENT
Norma Torres, Chair
AB 1246 (Jones) - As Amended: April 13, 2009
SUBJECT : Housing cooperative trust and workforce housing
cooperative trust
SUMMARY : Revises the definition of "limited-equity housing
cooperative" to include "housing cooperative trust" and
"workforce housing cooperative trust," defines and establishes
"housing cooperative trust" and "workforce housing cooperative
trust," and establishes a process for all three to dissolve.
Specifically, this bill :
1)Revises the definition of "limited-equity housing cooperative"
in the Subdivided Lands Law (Business & Professions Code
Section 11003.4 et al) to also apply to "housing cooperative
trust" and "workforce housing cooperative trust."
2)Applies the same exemptions to "housing cooperative trust" and
"workforce housing cooperative trust" in the Subdivided Lands
Law (Business & Professions Code Section 11003.4 et al) to
those that apply to "limited equity housing cooperative."
3)Adds the following to the conditions a limited-equity housing
cooperative, housing cooperative trusts and workforce housing
cooperative trust must comply with in order to be exempt from
the Subdivided Lands Law (Business & Professions Code Section
11003.4 et al):
a) The Federal Home Loan Bank System, one of its members or
a school district finances or subsidizes at least 50% of
the total construction or development cost or $100,000,
whichever is less; and
b) The property occupied by the cooperative was sold or
leased by a state agency, city, county, or a school
district for the development.
4)Permits a housing cooperative trust or workforce housing
cooperative trust that meets all of the exemption requirements
may elect to be subject to the Subdivided Lands Law (Business
& Professions Code Section 11003.4 et al).
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5)Revises the definition of "limited-equity housing cooperative"
in the Community Redevelopment Law (Health & Safety Code
Section 33000 et al) to apply to "housing cooperative trust"
and "workforce housing cooperative trust."
6)Prohibits the articles of incorporation or the bylaws of a
limited-equity housing cooperative, housing cooperative trust,
and workforce housing cooperative trust for purposes of
returning the "transfer value" of a stock or membership
interest in a trust from permitting the following:
a) A board of directors from returning the transfer value
either in full or in part to a member of the trust while he
or she still remains a member; and
b) An existing member of the board of directors from
accepting return of his or her transfer value either in
full or in part.
7)Specifies that the accumulated interest used in calculating
the transfer value of a membership's share be "simple".
8)Provides in any lawsuit against the board of directors or the
members for not complying with statutes that apply to a
limited-equity housing cooperatives, housing cooperative
trust, and workforce housing cooperative trust the plaintiff
will be awarded all attorneys fees and damages.
9)Prohibits a limited-equity housing cooperative, housing
cooperative trust, and workforce housing cooperative trust
that uses public funds from using any corporate funds to avoid
complying with state law and to pursue dissolution if the
intent or outcome is for some or all of the members to occupy
their units upon dissolution.
10) Prohibits members or the board of directors of a
limited-equity housing cooperative, housing cooperative trust,
and workforce housing cooperative trust from occupying units
in fee simple or as a rental once the trust has been
dissolved.
11) Defines workforce housing cooperative trust as an
organization that meets the requirements of a limited-equity
housing cooperative in the Community Redevelopment Law (Health
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& Safety Code Section 33000 et al) and complies with all of
the following:
a) Allows the governing board to be composed of two classes
of board members as follows:
i.One class is elected by the residents; and
ii.One class is appointed by sponsor organizations
including employer and employee
organizations, chambers of commerce, government entities,
unions, religious organizations, nonprofit organization,
cooperative organizations and other forms of
organizations.
b) Requires resident members to elect a majority of the
board members;
c) Allows sponsor organizations to appoint up to one less
than a majority of the board members;
d) Requires the numerical composition and class of the
sponsor and resident board members to be set in the
articles of incorporation and in the bylaws;
e) Requires the charter board of a workforce housing
cooperative trust to be made up only of sponsor board
members who will remain in place for the first three years
after the first resident occupancy;
f) Requires resident members to elect a majority of the
board members after three years of occupancy;
g) Prohibits the removal of the appointees of a sponsor
organization except for cause;
h) Allows for the issuance of separate classes of shares to
sponsor organizations that will be known as "workforce
housing shares" and may receive a rate of return of no more
than 10% simple interest pursuant to the articles of
incorporation or bylaws;
i) Provides a sponsor organization of a workforce housing
cooperative trust is entitled to perfect a security
interest in a cooperative interest or in sponsor shares it
has funded;
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j) Requires the affirmative vote of at least a majority of
the resident-owner members of the shareholders and a
majority of each class of board members to amend the bylaws
and articles of incorporation;
aa) Provides the rights of the sponsor board members or
the sponsor may not be changed without the affirmative vote
of two-thirds of the sponsor board members;
bb) Provides that members of the board of directors
shall only be removed for cause;
cc) Provides the conditions set forth for workforce
housing cooperatives apply to any organization previously
formed under this section prior to January 1, 2010 that has
sponsor seats designated in its bylaws;
dd) Provides a workforce housing cooperative trust
shall be entitled to operate at multiple locations in order
to sponsor limited-equity housing cooperatives;
ee) Provides a workforce housing cooperative trust may
either own or lease land for the purpose of developing
limited-equity housing cooperative; and
ff) Allows a workforce housing cooperative trust to be
created when at least 51% of the occupied units in a
multifamily property that is in foreclosed support efforts
to buy the building or property.
12)Establishes the following procedure for dissolving a limited
equity housing cooperative,
housing cooperative trust, or workforce housing cooperative
trust:
a) Requires a public hearing conducted by the county in
which the limited equity housing, cooperative, housing
cooperative trust or workforce housing cooperative trust is
located and paid for by the cooperative or trust that is
dissolving;
b) Requires the county to provide notice to all interested
parties at least 120 days prior to the date of the hearing;
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c) Requires the notice to be mailed first-class postage
pre-paid to all limited equity housing cooperatives and
cooperative development organizations in the state in an
effort to create a merger with an existing limited equity
housing cooperative;
d) Requires any merger of a dissolving cooperative or trust
to be with an existing cooperative or trust that is
geographically closest to the extent possible;
e) Provide that if a dissolving cooperative or trust does
not merge with an existing cooperative or trust both of the
following must occur:
i. The public hearing process must ensure that any
dissolution plan is free of private inurement and meets
the requirements of state and federal law; and
ii. Any dissolved housing units held by the trust
or cooperative are made available through a public
lottery supervised by the county in which the
cooperative or trust is located.
f) Provides that any sponsor organization of a workforce
housing cooperative trust has the legal standing of a
member unless it revokes its sponsorship in writing.
g) Provides in any action taken against a board of
directors and its members based upon a breach of corporate
or fiduciary duties or a failure to comply with statutes
that apply to cooperatives or trusts the prevailing party
will be awarded compensatory and punitive damages and
attorney's fees.
EXISTING LAW
1)Defines a "limited-equity housing cooperative" as a
corporation organized on a cooperative basis that meets any of
the following criteria:
a) Is organized as a nonprofit public benefit corporation;
b) Holds title to real property as the beneficiary of a
trust providing for distribution for public or charitable
purpose upon termination of the trust;
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c) Holds a title to real property subject to conditions
that will result in reversion to a public or charitable
entity upon dissolution of the corporation;
d) Holds a leasehold interest, of at least 20 years
duration conditioned on the corporation's continued
qualification as a limited equity cooperative and providing
for reversion to a public entity or a charitable
corporation;
e) The articles of incorporation or bylaws require that the
purchase price and sale of the stock or membership interest
of the residents owners is no more than the "transfer
value" as determined by the bylaws and must not exceed the
combination of the following:
i. the amount paid for the membership or shares
by the first occupant as shown in the books of the
corporation;
ii. the value of any improvements as determined by
the board of directors installed at the expense of the
member with prior approval of the board of directors; and
iii. the accumulated interest or inflation
allowance at a rate, which may be based on a
cost-of-living index, an income index or market-interest
index but shall not exceed a 10% annual increase on the
membership share by the first occupant of the unit.
f) The articles of incorporation or bylaws require the
board of directors to sell the stock or membership interest
to a new member or resident shareholders at a price that
does not exceed the "transfer value" as described above;
g) The "corporate equity" is defined as the excess of the
current fair market value of the corporations' real
property over the sum of the current transfer values of all
shares or membership interests reduced by the principal
balance of the outstanding encumbrances upon the corporate
real property.
h) The corporate equity must not be distributed to the
members if any encumbrances remain except for the following
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purposes and only as authorized by the board of directors
as provided by the limitations of the articles of
incorporation or bylaws:
i.for the benefit of the corporation or improvement of the
property;
ii.for the corporation to acquire additional property; and
iii.for public benefit or charitable purposes.
a) Requires upon the sale of the property, dissolution of
the corporation, termination of the trust or reverse of the
title to the real property the "corporate equity" is
required by the articles, bylaws, or trust or title to be
paid out, or the title to the property transferred, subject
to any encumbrances and liens for the transfer value or
membership interest, to use for the public or charitable
purpose.
b) Amendment of the bylaws and articles of incorporation
require an affirmative vote of at least two-thirds of the
resident-owners or members.
(Health & Safety Code Section 33075.5).
1)Provides a limited-equity housing cooperative is exempt form
the Subdivided Lands Law (Business & Professions Code Section
11003.4 et al) if the cooperative complies with all of the
following conditions:
a) A public entity directly finances or subsidizes at least
50% of the total construction or development cost or
$100,000 which ever is less of the limited-equity housing
cooperative or the real property on which the
limited-equity housing cooperative will be located was sold
by the Department of Transportation for the development of
a and limited-equity housing cooperative has a regulatory
agreement approved by the Department of Hosing and
Community Development (HCD) for the term of the permanent
financing;
b) No more than 20% of the total development cost of a
limited-equity mobilehome park and no more than 10% of the
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total development cost of other limited-equity housing
cooperatives is provided by the members;
c) A regulatory agreement for at least the term of the
permanent financing or subsidy is duly executed between the
recipients of the financing and either a federal or state
agency as specified or a local public agency providing the
financing under a regulatory agreement that meets HCD's
standards;
d) Assurances for completion of the common areas and
facilities to be owned or leased by the limited-equity
housing cooperative are in writing unless a construction
agreement contains these assurances;
e) There are governing instruments for the organization and
operation of the cooperative;
f) There is on going fiscal management of the cooperative;
g) Membership information is distributed to any perspective
purchaser prior to purchase;
h) Any federal, state or local public agency that executes
a regulatory agreement must be satisfied with the governing
documents of a limited-equity housing cooperative and other
agreements as specified;
i) Any federal or state agency that is providing a subsidy
to the limited-equity housing cooperative must receive a
legal opinion that the cooperative meets all the exemption
requirements;
j) Permits a limited-equity cooperative that meets all the
exemptions to choose to comply with the Subdivided Lands
Law (Business & Professions Code Section 11003.4 et al);
and
aa) The developer of the cooperative must claim the
exemption from the Subdivided Lands Law (Business &
Professions Code Section 11003.4 et al) with the Department
of Real Estate (DRE) on a form provided by DRE and which
DRE will keep for four years.
(Business & Profession Code Section 11003.4)
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FISCAL EFFECT : None
COMMENTS :
Background : A "limited equity housing cooperative"
(cooperative) is a corporation which is organized as a nonprofit
public benefit corporation which holds title to real property
for the benefit of a trust. Cooperatives are made up of members
who own stock in the corporation. Cooperatives usually receive
public financing from a federal, state or local public agency
which comes with a regulatory agreement. The regulatory
agreement must at the least provide assurances for the
completion of the common area, that the cooperative have
governing documents, that there is ongoing fiscal management of
the cooperative and that prospective members receive all
specified disclosures. If a cooperative meets certain
requirements including 50% of the total construction is financed
by a public agency, then it can receive an exemption from the
Subdivided Lands Law (Business & Professions Code Section
11003.4 et al) from DRE.
Members of a cooperative receive a variety of benefits
including: establishing personal income tax deductions, lower
turnover rates, lower real estate tax assessments (in some local
areas), controlled maintenance costs, and resident participation
and control. Rather than paying a mortgage payment each month,
each stockowner pays his or her share of the total operating
costs of the corporation.
By design, the transfer value of an owner's membership in the
cooperative is limited in order to keep the housing affordable.
The transfer value of a membership must be defined in the
articles of incorporation or bylaws of the cooperative and are
further limited in state law. The transfer value of a member's
share is the aggregate of the amount the first occupant paid for
the share, the value of any improvements made by the member (and
that were approved by the board of directors) to the share and
the accumulated interest on the share not to exceed 10% annual
increase on the amount originally paid for the share.
Purpose of this bill : According to the author, the existing law
authorizing limited equity housing cooperatives was created 30
years ago and in many ways the demand for affordable and
conveniently located housing has changed. Existing law has also
not kept up with changes in public and private finance
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opportunities in the marketplace for limited equity housing
cooperatives. The supply of entry level affordable housing is
far short of demand for low-to-moderate-income working
Californians. The U.S. Department of Housing and Urban
Development (HUD) reports that 12 million renter and homeowner
households pay more than 50% of their annual income for housing.
More than 1.2 million families of all income levels live in
homes owned and operated through cooperative associations.
Cooperative members own a share in a corporation that owns or
controls the buildings and or property in which they live. Each
shareholder is entitled to occupy a specific unit and has a vote
in the corporation. Every month, shareholders pay an amount
that covers their proportionate share of the expense of
operating the entire cooperative which typically includes
underlying mortgage payments, property taxes, management,
maintenance, insurance, utilities and contributions to reserve
funds.
Housing cooperatives can be townhouses, apartments, single
family homes, student housing, senior housing and mobilehome
parks. Limited-equity cooperatives limit the resale value of
shares and are generally targeted at low- and moderate- income
people who are at 80% to 120% of area median income. The
purpose of the limited equity cooperative structure is to
prevent speculation, encourage long-term residency and preserve
the affordable character of the cooperative for future
residents.
Workforce housing cooperative : AB 1246 would authorize a new
type of cooperative housing, the workforce housing trust. A
sponsor group, most likely an employer or employee group would
be authorized to bring equity, fund, lease land, and permanently
protect the assets of the affordable housing units which will
meet the needs of workers. According to the sponsor, under one
possible scenario, "a company, city or school district has or
obtains land and leases it to the cooperative for 99 years. The
cooperative builds a multifamily community on site. The leasing
entity then reserves the right for its employees to have a
priority on the waiting list for all or at least some of the
units. Initially, the leasing entity could have first
preference given its own employees and make any remaining units
available to the public."
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Under another potential scenario, "either a single entity or a
group, employers, unions or public agencies could jointly
sponsor a workforce housing cooperative. Each single entity
could agree to sponsor a set number of units in a cooperative.
For example, each entity could pledge $20,000 to sponsor a unit
for which it retains reservation rights for its own employees or
union members. If the sponsor lacks employees or union members
to fill, the unit, the cooperative could fill it from a waiting
list. When a unit turns over, the sponsor who had not taken
their share of sponsor units could be given first priority on
the waiting list. Sponsors also could provide their employees
or union members with the $5,000 down payment."
This bill proposes to distinguish a workforce housing trust from
a limited-equity housing cooperative by the membership of the
corporation. As proposed, the governing board of the workforce
housing cooperative would be made up of two classes of sponsors,
one class would be elected by the residents and the other made
up of the sponsor organization which could be an employer,
union, religious organization, government entity, and nonprofit
organization. The board members elected by the sponsor
organization would only be appointed for three years after which
the residents would elect a majority of the members. In order
to amend the bylaws, both a majority vote of the
resident-members of the cooperative and a majority of the
sponsor organization would be needed. This bill makes the
requirements for a workforce housing cooperative retroactive by
applying them to workforce housing cooperatives that may already
be formed.
Dissolving a limited-equity housing cooperative : For
limited-equity housing cooperatives, existing law specifies that
the corporate equity of a limited-equity housing cooperative may
not be distributed to the members except to make improvements to
the property, to acquire more property and for public benefit or
charitable purposes. Any distribution must be approved by the
board of directors and is subject to any limitations included in
the bylaws. Existing law specifies that if the property is sold
or the corporation is dissolved the corporate equity minus the
transfer value of the membership interest or shares is required
to be used for public or charitable purpose.
Under existing law in order to dissolve a non-profit
corporation, a majority of the directors in office must sign a
certificate of dissolution and file it with the Attorney
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General's (AG) Office. The statement must verify that the
corporation has been completely wound up, all known debts and
liabilities have actually been paid or adequately provided for,
that all known assets have been distributed to the persons
entitled to them, and that the corporation is dissolved. Prior
to filing a certificate of dissolution with the AG's Office a
non-profit corporation must also file a certificate of
satisfaction with the Franchise Tax Board verifying that all
taxes have been paid or secured.
AB 1246 would establish a new procedure for dissolving a
limited-equity housing cooperative, workforce housing
cooperative or housing cooperative. The procedure would require
a public hearing conducted by the county in which the
cooperative is located and paid for by the dissolving
cooperative. The county would be required to notify all
interested parties including all other limited-equity housing
cooperatives and limited-equity cooperative organizations in the
state who might be interested in merging with the dissolving
cooperative. If the dissolving cooperative does not merge with
an existing cooperative any dissolving units held by the
cooperative must be made available to the public by a lottery
supervised by the county.
Seemingly the rationale behind a public dissolution process, is
that cooperatives are created for a public benefit and are
usually financed using public dollars, therefore there should be
a public process for their dissolution. Additionally, this
process would seem to eliminate the potential for the equity in
the cooperative to be disproportionately transferred to a
members or members of the cooperative as a result of
dissolution.
Existing law details the limited cases in which the corporate
equity of a cooperative can be distributed to the membership and
requires upon dissolution that the corporate equity be used for
a charitable purpose. It is somewhat unclear how the current
procedure is deficient and how the new procedure created in this
bill would affect the existing one.
It is somewhat unclear what is accomplished through the merger
of a dissolving cooperative with another cooperative. If there
is a regulatory agreement attached to the cooperative would it
transfer with the property and as a result the merging
cooperative would enforce it? Also, is it possible that a
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cooperative may have a legitimate financial reason for
dissolving because sustaining the corporation is financially
unfeasible? Would it be appropriate to specify that the
dissolution procedure only applies to limited-equity housing
cooperatives, workforce housing cooperatives and housing
cooperatives that meet the exemptions of the Subdivided Lands
Law (Business & Professions Code Section 11003.4) and therefore
by definition have public subsidy?
Arguments in opposition :
Walnut House Cooperative (WHC), a limited-equity housing
cooperative, opposes the bill because it specifies that the
interest computation on the transfer value of a share must be
based on a simple interest computation. WHC's bylaws require
them to do their computation based on compound interest and
amending the bylaws is an expensive process.
WHC also is opposed to the dissolution procedure because they
contend that members have certain rights if a limited-equity
housing cooperatives dissolves and the bill would take away
those rights and impose new duties. WHC states "while as a
matter of policy we support the creation and perpetual existence
of limited equity housing cooperatives we do not think that it
is fair to take away such rights from existing cooperative." WHC
recommends that the dissolution procedure only apply to newly
formed cooperatives.
Committee amendments :
The committee may wish to consider the following amendments:
1)Remove the provision making the requirements of the workforce
housing cooperative retroactive to any organization previously
formed prior to January 1, 2010.
2)Make the provisions of Section 4 of the bill regarding
dissolving a housing cooperative, workforce housing
cooperative, and limited-equity housing cooperative apply only
to cooperatives that receive public subsidy as defined in
Business & Professions Code Section 11003.4.
3)Allows existing limited-equity housing cooperatives whose
bylaws specify compound interest to continue their current
practice and apply the simple interest computation to newly
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formed cooperatives.
Double referred : The Assembly Committee on Rules referred AB
1246 to the Committee on Housing and Community Development and
Judiciary. If AB 1246 passes this committee, the bill must be
referred to the Committee on Judiciary.
REGISTERED SUPPORT / OPPOSITION :
Support
Burbank Housing Development Corporation, Santa Rosa
California Center for Cooperative Development, Davis
Mogavero Notestine Associates, Architects and Planners,
Sacramento
National Cooperative Business Association
Nehemiah Community Reinvestment Fund, Inc.
One individual, Pasadena
Opposition
Walnut Housing Cooperative (WHC), Berkeley
Analysis Prepared by : Lisa Engel / H. & C.D. / (916) 319-2085