BILL ANALYSIS
SENATE JUDICIARY COMMITTEE
Senator Ellen M. Corbett, Chair
2009-2010 Regular Session
SB 547
Senator Runner
As Amended April 23, 2009
Hearing Date: May 12, 2009
Business and Professions Code
ADM:jd
SUBJECT
Real Estate: Subdivided Lands
DESCRIPTION
This bill would exempt from the definition of "subdivided lands"
and "subdivision" an undivided interest in raw land that meets
five specified conditions, including the condition that a
purchaser be given a completed disclosure statement before
executing a purchase and sale agreement.
BACKGROUND
The Subdivided Lands Act (SLA) is a consumer protection statute
whose purpose is to prevent fraud and misrepresentation in the
marketing of subdivided land by requiring disclosure of certain
financial, qualitative, and quantitative information to
prospective purchasers or lessees. (Bus. & Prof. Code Sec.
11000 et seq.) The SLA is administered by the Real Estate
Commissioner (Commissioner) and requires subdividers of planned
developments, community apartment projects, condominiums, and
stock cooperatives to file extensive financial and other
disclosures with the Commissioner before the sale or lease of
subdivided lands. Based upon those disclosures, the
Commissioner issues public reports that must be provided to a
prospective purchaser or lessee before a transfer. With some
exceptions, no subdivision can be offered for sale until the
Commissioner has issued a subdivision public report.
There are various types of subdivisions, including undivided
interest subdivisions. An undivided interest is a partial or
fractional interest in an entire parcel of land. The land
(more)
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itself has not been divided, but its ownership has been divided.
The creation, for sale, lease, or financing, of five or more
undivided interests in land, whether or not improved,
constitutes a subdivision and a public report is required prior
to marketing the interests. The SLA provides for several
exemptions, including, among others, purchase of the undivided
interests by people related by blood or marriage or by 10 or
fewer persons who: 1) are informed concerning the risks of
ownership; 2) are not purchasing the property for resale; and 3)
waive the protections offered by the SLA.
This bill would add an exemption for undivided interests in raw
land.
CHANGES TO EXISTING LAW
Existing law , the SLA, requires any person who intends to offer
subdivided lands within the state for sale or lease to file with
the Department of Real Estate (DRE) an application for a public
report consisting of a notice of intention and a completed
questionnaire. The notice of intention is required to contain
15 items, including, among others:
(1) the legal description and area of lands;
(2) a true statement of the condition of the title (including
encumbrances);
(3) a true statement of the terms and conditions on which it is
intended to dispose of
the land;
(4) a true statement of the provisions for public utilities;
(5) a true statement of the use or uses for which the proposed
subdivision will be offered;
(6) a true statement of the amount of indebtedness that is a
lien on the subdivision;
(7) information about school districts and airports; and
(8) a true statement about any soils or geologic reports and
whether or not fill was used. (Bus. & Prof. Code Sec.
11010.)
Existing law requires the Commissioner to issue a public report,
as specified, after the notice and application are determined to
be qualitatively and substantially complete, and the submittal
of recorded or filed instruments and evidence of financial
arrangements required by the Commissioner. The public report
authorizing the sale or lease in this state of the lots or
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parcels within the subdivision must contain all the data
obtained in accordance with Section 11010. (Bus. & Prof. Code
Secs. 11010.2, 11018.)
Existing law defines "subdivided lands" and "subdivision,"
except as specified, as improved or unimproved land or lands,
wherever situated within California, divided or proposed to be
divided for the purpose of sale or lease or financing, whether
immediate or future, into five or more lots or parcels. (Bus. &
Prof. Code Sec. 11000.)
Existing law provides that "subdivided lands" and "subdivision"
also include improved or unimproved land or lands, a lot or
lots, or a parcel or parcels, of any size, in which, for the
purpose of sale or lease or financing, whether immediate or
future, five or more undivided interests are created or are
proposed to be created. (Bus. & Prof. Code Sec. 11000.1(a).)
Existing law exempts from the definition of "subdivided lands"
and "subdivision" specified undivided interests if certain
conditions exist, including, for example, the undivided
interests are held or to be held by persons related by blood or
marriage; the undivided interests are created as the result of a
foreclosure sale; or the undivided interests are created by a
valid court order or decree. (Bus. & Prof. Code Sec.
11000.1(b).)
This bill would exempt from the definition of "subdivided lands"
and "subdivision" undivided interests in raw land if all of the
following conditions of the raw land are met:
(1) The undivided interests are sold in raw land that is not
improved by any structure, except roads or utilities, and
with no promise on the part of the subdivider to develop the
raw land.
(2) There are 25 or fewer undivided interests.
(3) The purchase and sale agreement provides for a deposit of
no more than three percent of the purchase price and grants
the purchaser the right to cancel the agreement and receive a
full refund of the deposit up to four days before the closing
date set forth in the agreement.
(4) There are no blanket encumbrances on the raw land
following the sale of the first undivided interest.
(5) The purchaser is given a completed disclosure statement
before the purchaser's execution of the purchase and sale
agreement.
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COMMENT
1. Stated need for the bill
The author writes:
Individuals should be free to contract to buy undivided
interests in raw land provided they are given accurate
information about the land and advised of the risks of such a
purchase. These sales provide a needed market in a time of
severe economic downturn, generally increase the tax base,
employ brokers, and offer consumer protection.
Additionally, state law is out of sync with the Federal
Interstate Land Sales Full Disclosure Act, which applies to
subdivisions of 25 or more lots, and does not include
undivided interests as lots. [State law is also out of sync
with] the laws of many other states, which either establish a
threshold of 20 or more lots and/or do not apply to undivided
interests.
2. The DRE's description of its process for issuing public
reports for raw land; author's asserted problems with the
process
This bill would exempt raw land from the requirements of the
SLA, including that a public report be issued. Committee staff
inquired of the DRE as to its current process for issuing public
reports for raw land. In response to those inquiries, the DRE
informed committee staff that when a developer of raw land
applies for a public report he or she checks a box on the
application that states the purpose for marketing the land
(which is a requirement of all applications). If the applicant
checks the box that says the purpose is "investment merit," the
DRE asks for a feasibility study, which must be prepared by an
independent third party and must include an appraisal. The key
issue for the DRE is how the developer is going to market the
raw land and the feasibility study provides important
information about the land, including whether access to
utilities will be possible, to potential buyers. The DRE
includes a special note in the public report that outlines the
risks involved in the purchase of raw land. If an applicant for
a public report fails to provide the feasibility study, the DRE
sends a written deficiency to the applicant. The DRE states
that this has been its policy for many years.
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The author also states that the DRE requires proof of
"investment merit" before issuing raw land public reports for
the marketing of undivided interests in raw land and requires
sellers to provide a "feasibility study." The author believes
that, "given the uncertainties inherent in the sale of raw land
not yet zoned or planned for development, these feasibility
studies could mislead the public, rather than inform, and
[could] put the seller at risk of claims of deception and the
like."
The author asserts that there have been consistent increases in
land value over time, with periodic swings, and as the
population increases, so does development. Therefore, the
author asserts that SB 547 "would allow small investors the
option to include real estate in their portfolios in a way that
is presently disallowed. In light of the tragic meltdown of
domestic and international stock markets, California land
appears to be a good long term investment to many people and SB
547 would facilitate such purchases."
Because this bill would exempt undivided interests in raw land
from the SLA and thus from the public report, it would deprive
potential buyers of the important information contained in the
report and special note.
3. Would this bill, which would provide an exemption to the
SLA for undivided
interests in raw land, provide adequate consumer protection;
illustrative example
This bill would exempt from the definition of "subdivided lands"
and "subdivision" and thus from the SLA, the marketing, sale,
and transfer of undivided interests in raw land under specified
conditions. As the courts have underscored, the SLA is a
consumer protection statute, "a necessary and reasonable
protection against fraud and sharp practices" on the part of
sellers. (See, e.g., People v. Byers, et al. (1979) 153
Cal.Rptr. 249, 253; Yuba Cypress Housing Partners v. Area
Developers (2002) 120 Cal.Rptr.2d 273, 278 [purpose of the SLA
is to protect members of the public who purchase lots or houses
from developers; "when a plaintiff purchased land under a
contract that does not comply with the [SLA], the courts will
allow the plaintiff to enforce the contract against the seller
or to disaffirm the contract"].) The consumer protections
afforded by the SLA include the comprehensive required
disclosures about the subdivided land, and the fact that if the
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seller fails to meet the DRE's disclosure and other
requirements, a public report will not be issued and the
subdivided land may not be marketed, sold, or transferred.
As an example of the problem with allowing an exception to the
SLA, public DRE records show that one individual and various
business entities related to him have been the subject of a
number of desist and refrain (from selling or leasing or
offering for sale or lease any lot or parcel in any subdivision)
orders, revocation of broker's license orders, and denial of
reinstatement orders over many years. The individual and his
business entities were in the business of selling fractionalized
interests in real property in various California counties, at
least some of which, to the best of the DRE's knowledge,
involved raw land. Over the years and the course of numerous
orders, the DRE found that the individual and his companies
violated the SLA by unlawfully selling interests in subdivided
lands without first obtaining a public report. A number of
those unlawful sales resulted in litigation involving the
buyers. This raises the question of whether the exemption from
the SLA proposed by this bill is good consumer protection
policy.
However, the author asserts that the bill's disclosure
requirements would protect purchasers of undivided interests in
raw land. This bill would provide for a disclosure statement to
be made prior to execution of a purchase and sale agreement for
undivided interests in raw land. The disclosure statement would
be required to include notice of various risk factors associated
with purchasing raw land, including:
(1) it is a highly speculative investment;
(2) the holdings (tenant-in-common interests) are not liquid
(there is no established trading market for these
interests);
(3) neither the subdivider nor any third party will be
responsible for managing or developing the interests in raw
land that are being purchased;
(4) water, flood, and earthquake risks governmental
approvals/certifications of any significant residential
developments are required;
(5) conflict of interest issues with the subdivider may arise;
(6) property taxes will apply; and
(7) there may be bankruptcy filings and civil and criminal
judgments entered against the subdivider.
The question arises as to whether the above disclosures, which
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would not require, to some extent, the same amount and kind of
information required under the SLA, would provide adequate
consumer protections to purchasers of undivided interests in raw
land, particularly if those purchasers are small-scale
investors, and perhaps less sophisticated, investors.
4. Would this bill encourage potentially economically damaging
land speculation?
Land speculation, which this bill would allow for, has long been
the subject of examination and commentary. Land speculation is
generally defined as investors buying land cheaply in large
quantities and withholding it from the real estate market until
rising prices bring in profits. This bill would allow land
speculators to purchase undivided interests in raw land outside
of the SLA protections, particularly the public report. Over
the years, land speculation has been blamed many times for major
business-cycle depressions. (See, e.g., Land Speculation: What
is it Bad For? (1998) The Progress Report, Fred E. Foldvary
["the reason land speculation causes depressions is that it
raises the land price too high for those wanting land for actual
use"]; Profit with Real Estate Land Speculation (2007) Andrew
Beattie, Investopedia ["from the perspective of a small-scale
real estate investor, land speculation is an expensive and risky
business" and requires large amounts of capital and research].)
Would this bill once again overly encourage land speculation and
result in its negative economic impact?
5. This bill would run counter to the land use policies
adopted by AB 32 (Nunez, Ch. 488, Stats. 2006) and SB 375
(Steinberg, Ch. 728, Stats. 2008)
In 2006, the Legislature enacted AB 32, the Global Warming Act
of 2006, which requires the Air Resources Board (ARB) to
establish a statewide greenhouse gas emissions limit such that
by 2020 California reduces its greenhouse gas emissions to the
level they were in 1990. Thereafter, the ARB must adopt the
maximum feasible and cost-effective reductions in greenhouse gas
emissions for sources subject to the Act. One of the potential
strategies for reducing greenhouse gas emissions is to promote
more compact land use that reduces the number and length of
vehicle trips.
In 2008, the Legislature enacted SB 375, which requires the ARB
to provide each region with greenhouse gas emission reduction
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targets for the automobile and light truck sector; requires a
regional transportation plan to include a Sustainable
Communities Strategy designed to achieve the targets for
greenhouse gas emission reduction; and requires cities and
counties to revise their housing elements eight years in
conjunction with the regional transportation plan. The goal of
SB 375 is to help implement AB 32 by aligning planning for
housing, land use, transportation, and greenhouse gas emissions
across the state's regions. Senate Bill 375 seeks to change
land use practices in California by giving each region a
greenhouse gas emission reduction target and requiring the
regions to adopt regional growth strategies that can achieve
these targets.
This bill would run counter to the land use policies and goals
of AB 32 and SB 375 by allowing unregulated speculative
investment in raw land, which is most often on the fringes of
regions. Making it easier to form land investment syndicates
that create investment-backed expectations of increased urban
sprawl is the opposite of what is intended by AB 32 and SB 375,
which is to reduce greenhouse gas emissions by promoting more
compact land uses.
6. Comparison to federal law
The Federal Interstate Land Sales Full Disclosure Act (FILSFDA)
generally applies to the sale or lease of lots in a subdivision
by making the use of interstate commerce or the mails, and
unless the sale or lease is exempt under the FILSFDA, the
developer must register the subdivision with the Department of
Housing and Urban Development (HUD). The sale or lease of fewer
than 25 lots is exempted from the FILSFDA. The author asserts
that California law is thus out of sync with the FILSFDA, in
that under the FILSFDA, the sale of 25 or fewer lots are
exempted. However, the sale and use of real estate is something
the state generally regulates and thus, California may choose to
enforce regulation different from the federal government.
Support : None Known
Opposition : None Known
HISTORY
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Source : Author
Related Pending Legislation : None Known
Prior Legislation : None Known
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