BILL ANALYSIS �
AB 569
Page 1
CONCURRENCE IN SENATE AMENDMENTS
AB 569 (Chau)
As Amended July 1, 2014
Majority vote
-----------------------------------------------------------------
|ASSEMBLY: |78-0 |(January 29, |SENATE: |36-0 |(August 11, |
| | |2014) | | |2014) |
-----------------------------------------------------------------
Original Committee Reference: H. & C.D.
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 in the purchase
contract that the property is subject to a blanket
encumbrance;
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 require the association to
create and maintain during the term of the blanket
encumbrance all of the following:
i) Prior to the sale of any individual interests, a
financing reserve amount equal to at least two months of
the amount of the debt service payments due on the
blanket encumbrance.
ii) Within one year of the sale of at least 25% of the
AB 569
Page 2
individual interests, a financing reserve amount equal to
at least three months of the amount of the debt service
payments due on the blanket encumbrance.
iii) Within one year of the sale of at least 50% of the
individual interests, a financing reserve amount equal to
at least five months of the amount of the debt service
payments due on the blanket encumbrance.
iv) Within one year of the sale of at least 75% of the
individual interests, a financing reserve amount equal to
at least eight months of the amount of the debt service
payments due on the blanket encumbrance.
1)Exempts common interest developments (CIDs) from the election
provisions of the Davis Stirling Act if the governing
documents of the homeowners association (HOA) provide that all
members of the CID are automatically members of the board of
directors of the HOA.
The Senate amendments create a graduated financing reserve
schedule by allowing a stock cooperative or LEHC to be sold or
leased subject to a blanket encumbrance if, in addition to
notifying prospective purchasers of the blanket encumbrance and
obtaining a public report from the BRE, the governing documents
require the association to create and maintain during the term
of the blanket encumbrance all of the following:
1)Prior to the sale of any individual interests, a financing
reserve amount equal to at least two months of the amount of
the debt service payments due on the blanket encumbrance.
2)Within one year of the sale of at least 25% of the individual
interests, a financing reserve amount equal to at least three
months of the amount of the debt service payments due on the
blanket encumbrance.
3)Within one year of the sale of at least 50% of the individual
interests, a financing reserve amount equal to at least five
months of the amount of the debt service payments due on the
blanket encumbrance.
4)Within one year of the sale of at least 75% of the individual
interests, a financing reserve amount equal to at least eight
months of the amount of the debt service payments due on the
blanket encumbrance.
AB 569
Page 3
FISCAL EFFECT : According to the Senate Appropriations
Committee, pursuant to Senate Rule 28.8, negligible state costs.
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
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
AB 569
Page 4
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 the
cooperative builds and maintains a graduated debt service
reserve, obtains a public report from the BRE, and cooperative
members receive clear and specific notice of the risks of buying
a share subject to a blanket encumbrance.
Prior to the Senate amendments, the debt service reserve
provision would have required cooperatives to build a reserve
fund sufficient to make mortgage payments for three months. The
Senate amendments create a graduated debt service reserve that,
depending on the percentage of individual shares purchased,
requires a cooperative to maintain between two and eight months'
debt service reserve.
Exempting LEHC from the Public Report Requirement: Current law
exempts 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 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 United States
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
AB 569
Page 5
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
to serve on the board.
Analysis Prepared by : Rebecca Rabovsky / H. & C.D. / (916)
319-2085
FN: 0004602