BILL ANALYSIS �
AB 569
Page 1
Date of Hearing: January 15, 2014
ASSEMBLY COMMITTEE ON HOUSING AND COMMUNITY DEVELOPMENT
Ed Chau, Chair
AB 569 (Chau) - As Amended: September 12, 2013
SUBJECT : Real property: divided lands
SUMMARY : Makes several changes to the law to assist in the
development and finance of cooperative housing. Specifically,
this bill :
1)Expands the category of institutions that a Limited Equity
Housing Corporation (LEHC) or workforce housing cooperative
trust can receive financing from, to receive an exemption from
the requirement to obtain a public report from the Bureau of
Real Estate, to include a state or federally chartered credit
union or a certified community development institution (CDFI).
2)Allows a stock cooperative or LEHC to be sold or leased
subject to a blanket encumbrance if all the following
conditions are met:
a) Prospective purchasers are notified that the property is
subject to a blanket encumbrance in the purchase contract;
b) The property has obtained a public report from the
Bureau of Real Estate (BRE) that accounts for the blanket
encumbrance; and
c) The governing documents of the homeowners association
(HOA) require the HOA to create, within one year of the
sale of 50% of the shares and maintain during the term of
the blanket encumbrance, a financing reserve equal to at
least three months of debt service payments due on the
blanket encumbrance, or a lessor amount approved by the
Commissioner of BRE.
1)Exempts common interest developments (CIDs) from the election
provisions of the Davis Stirling Act if the governing
documents of the HOA provide that all members of the CID are
automatically members of the board of directors of the HOA.
EXISTING LAW
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1)Provides that a limited-equity housing cooperative or a
workforce housing cooperative trust is exempt from the SLL
(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, whichever 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 that has a
regulatory agreement approved by the Department of Housing
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
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 ongoing 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;
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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 Bureau of
Real Estate (BRE) on a form provided by BRE and which BRE
will keep for four years. (Business & Professions Code
Section 11003.4)
2)Permits a subdivision to be offered for sale subject to a
blanket encumbrance without a release clause if the following
conditions are met:
a) The purchaser or lessee deposits an amount that is the
entire sum of money paid for a lot or parcel or an amount
that the Commissioner of BRE determines is sufficient to
protect a purchaser is deposited into an escrow account
until:
i. A proper release can be secured;
ii. The owner, subdivider or agent, or the purchaser
or lessee, defaults on the sales contract; and
iii. The owner, subdivider or agent orders the return
of the deposited money to the purchaser.
a) The title to the subdivision is going to be held in a
trust that the commissioner of BRE determines is acceptable
until a release can be obtained;
b) A bond is issued to the State of California and
furnished to the commissioner which provides for the return
of the moneys paid or advanced by any purchaser or lessee;
and
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c) The commissioner of BRE provides an alternative
requirement which is deemed acceptable to protect the
interest of the purchaser or lessee. (Business and
Professions Section 11013.2)
FISCAL EFFECT : Unknown.
COMMENTS :
Background : Nationwide, 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 building 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. Cooperatives can be townhouses, apartments,
single family homes, student housing, senior housing, and
mobilehome parks. The purpose of the cooperative structure is
to prevent speculation, encourage long-term residency, and
preserve the affordable character of the cooperative for future
residents.
Purpose of this bill: In California, a cooperative is created
when a corporation is formed for the purposes of holding title
to a property, and where all or substantially all of the members
or shareholders of the corporation are entitled to lease a unit
in the property. Cooperatives lower the barrier to property
ownership, and create an important vehicle for the creation and
preservation of affordable housing. This bill would remove one
of the more significant barriers to financing cooperative
housing.
Blanket encumbrance : The California Subdivided Lands Act
prohibits, with a few limited exceptions, the sale of
cooperative shares when the units are subject to a "blanket
encumbrance." A blanket encumbrance is a single mortgage taken
out by the corporation and secured by the entire property. The
prohibition on blanket encumbrances serves to protect
cooperative members from losing their homes and investments in
the event that one member of the cooperative fails to make
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payments to the single mortgage. However, the prohibition on
blanket encumbrances has the effect of banning cooperatives in
California, because lenders generally will not lend on
individual units in a cooperative. In other parts of the
country, including New York where cooperatives are a common form
of ownership, cooperatives can finance the purchase of a
building with a single blanket mortgage. This bill creates
safeguards to protect members of cooperatives, while allowing a
cooperative to obtain a mortgage. A cooperative could sell
units subject to a blanket encumbrance so long as cooperative
members receive clear and specific notice of the risks of buying
a share subject to a blanket encumbrance, the cooperative has
built a reserve fund sufficient to make mortgage payments for
three months, and obtained a public report from BRE.
Exempting LEHC from the Public Report Requirement: Current law
exempts Limited Equity Housing Cooperatives (LEHCs) from the
public report requirement when a LEHC is financed by one or more
agencies, listed in the statute, and when those agencies enter
into a regulatory agreement to ensure proper structuring and
operation of the LEHC. This bill would add state or federally
chartered credit unions and state or federally certified
community development financial institutions (CDFIs) to the list
of financing agencies qualified to enter into the agreement
under the public report exemption. State CDFIs are certified by
the Department of Insurance and must have community development
as their primary mission and they must lend in urban rural or
reservation-based communities in the state. A community
development financial institution may include a community
development bank, a community development loan fund, a community
development credit union, a microenterprise fund, a community
development corporation-based lender, or a community development
venture fund. Federal CDFIs are certified by the U.S. Treasury,
have a primary mission of community development, and provide
both financial and educational services.
Elections for board members in cooperatives : Cooperatives are
by definition CIDs and must comply with the Davis Stirling Act
(the Act). The Act requires elections to conform to an
extensive process including requiring the HOA provide each owner
with a double stuffed envelope in which to return a ballot. In
some cases the bylaws of an HOA require all of the members to
serve on the board of directors. Therefore election of the
members is not required. This bill would exempt any CID from
that procedure if, the governing documents require all members
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to serve on the board.
REGISTERED SUPPORT / OPPOSITION :
Support
California Center for Cooperative Development (sponsor)
Bay Area Community Land Trust
East Bay Cooperative Housing California
San Francisco Community Land Trust
Sustainable Economies Law Center
Walnut House Cooperative
Two individual letters
Opposition
None on file.
Analysis Prepared by : Lisa Engel / H. & C.D. / (916) 319-2085