Legislature(2001 - 2002)
03/06/2002 03:20 PM House L&C
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 470-COMMON INTEREST OWNERSHIP Number 040 CHAIR MURKOWSKI announced that the committee would now hear HOUSE BILL NO. 470, "An Act relating to common interest ownership; and providing for an effective date." REPRESENTATIVE ROKEBERG, sponsor, introduced HB 470 to the committee. He asked if the committee would consider adopting the proposed committee substitute (CS), Version F. Number 053 REPRESENTATIVE HALCRO moved to adopt the CS for HB 470, version 22-LS1522\F, Kurtz, 2/25/02, as the working document. There being no objection, Version F was before the committee. REPRESENTATIVE ROKEBERG offered that [HB 470] is a small technical change to the state statute [AS 34.08.580]. He said this particular provision of the Uniform Common Interest Ownership Act (UCIOA) is the controlling statutory title under which all condominium, cooperative, and public PUD (planned unit development) type of developments are controlled and regulated by the State of Alaska. He mentioned that this issue was brought to his attention by Mr. Jonathan Faulkner of Homer, Alaska, who is having difficulty with a new development at Land's End [Resort]. He mentioned that [HB 470] is consistent with work he has done with the Alaska Home Builders Association in trying to revise the UCIOA. He stated that provisions [in HB 470] address what's called the public offering statement (POS), which is the "technical fix". Number 088 REPRESENTATIVE ROKEBERG said that the reason for introducing HB 470 is because the current law provides that a purchaser, prior to the conveyance of title, may cancel a purchase agreement within 15 days of receipt of a POS. He explained that a POS has to be provided before closure can be made on a sale of a condominium, which becomes a problem, particularly in the presale of high-end condominiums. Under current statute, a POS, which includes the final legal as-built survey and legal description, cannot be provided until such time as the project is completed. Number 111 REPRESENTATIVE ROKEBERG explained that in order to overcome that provision in the statute HB 470 simply [requires] that a preliminary version of the POS be provided such that it reasonably reflects the contents of the final POS. He mentioned that the CS added, in Section 2, page 3, line 29, the words "up to". REPRESENTATIVE ROKEBERG said: What, in essence, we've done is set up a scenario in state statute where somebody could commit to buying an expensive condominium, wait for the presentation of the [POS] and then decline to buy it and reap profits from his denial of fulfilling his contract. That's not a good way to have the statute written. Hopefully that's not happened, but we need to correct it before it does. REPRESENTATIVE ROKEBERG pointed out that many times it's very difficult to get construction financing if this statute is "over the head of the developer." He mentioned that there are people online who can testify to the practical impacts of this. Number 141 CHAIR MURKOWSKI said that the only question that she has is regarding the wording "reasonably reflects", and asked if this language is [tantamount to] "substantially similar". How close does "reasonably reflect" have to be to the actual public offering [statement], she asked. REPRESENTATIVE ROKEBERG said that he would have to defer to the drafter, but he would assume that "the reasonable standard would be accepted as the reasonable standard of basic common law." He [assumed] that the common practice would be that the basic POS would be provided except for those things that couldn't be included until the final as-built survey and other procedures were completed. Because there are a number of units in a condominium project, there's a certain amount of continuity. Number 164 JON FAULKNER, President, Land's End Acquisition Corporation, testified via teleconference. He said that he sent an e-mail to the committee members yesterday, and noticed today that at least two of the messages did not go through. He said that he would like to read the short letter. CHAIR MURKOWSKI informed Mr. Faulkner that each committee member's packet includes a copy of his letter. She asked if he was referring to the letter dated February 26. MR. FAULKNER clarified that it wasn't the same letter. He noted his agreement with Representative Rokeberg in that HB 470 is not a change in law but rather a clarification of an existing law that is vague. The law is vague because it leaves in doubt whether a POS can meet all the legal requirements if it is delivered in good faith prior to actual construction of the unit. He explained that HB 470 clarifies that a POS that reasonably reflects the data contained in the final recorded declaration, [when] delivered prior to construction, meets the intent of the law. Delivery Of a POS to a buyer prior to construction is standard practice. He highlighted that the 15- day right of rescission starts as soon as the POS is delivered and the deposit becomes non-refundable after the 15-day period. This is the negotiated protection that a developer needs in order to proceed with a large custom condominium project. He explained that under the existing law, a buyer could make a legal claim that the preliminary POS that he/she received prior to construction wasn't precisely accurate. Therefore, the contract would be voided because it didn't contain the precise square footages and the common interest allocations that are determined by an as-built survey. Number 208 MR. FAULKNER mentioned that there has never been a claim brought before a court on this subject, and HB 470 would prevent that possibility in the future. The purpose of a POS and the 15-day right of rescission is to assure full disclosure to prevent pressure sales tactics that might result in a hasty decision from a buyer. This generally gives a buyer time to reflect on the cost and the risks of ownership. He offered that HB 470 does not compromise any of these purposes, but rather removes a loophole which has the potential to cause huge losses to a developer. He said: Banks and financial institutions are aware of this loophole, as are contractors, and therefore when you go to sign a contract with the contractor or apply for financing to a bank, the question comes up, "What are you going to do if the buyer cancels your contract once you've already built the thing?" And you can't answer that, other than to say, "I've got $2 million in cash sitting in the bank," which not many developers do, and it's not a reasonable expectation. Number 228 REPRESENTATIVE ROKEBERG asked Mr. Faulkner how difficult it is to obtain construction financing because of this loophole. MR. FAULKNER said that it is more difficult to obtain construction financing with this loophole than without it. He said that banks do not look at the collateral of the contract to fund interim construction. Traditionally banks look at the net worth of the developer and the developer's track record. Although banks also look at the real estate, if the real estate isn't secured by an ironclad contract with performance guarantees, then a bank can't look to that. This results in the banks looking to the developer for the full net worth, exclusive of the project, to back the interim construction. He explained that the difficulty in obtaining financing is related to the strength of the developer. The effect is to limit interim construction financing for projects like [Land's End Resort] to the very large developers. Mr. Faulkner added that in Land's End's case obtaining financing hasn't been an "extreme" problem because of its significant assets in an ongoing enterprise. However, [the loophole] has definitely impacted its ability to obtain financing. Number 255 BOB PETERSON, The Peterson Group Inc., testified via teleconference. He noted that he is a custom homebuilder and condominium developer in Anchorage. He said this area of statute has intimidated him because while he can provide a buyer with the preliminary POS, he can't record the plat and the consequent declarations to fulfill a fully amended POS until there is substantial completion of that building. He explained that "substantial completion" is defined as having the roof on and all of the mechanicals in place. He said that at that point in a custom product there can be numerous changes unique to that particular buyer. Number 273 MR. PETERSON said: Yet the way this was worded, until that point the buyer could take 15 days after you recorded the plat declarations and then cancel the contract, in which case the developer who's made all the changes in good faith, has a unique unit that may not be marketable. MR. PETERSON mentioned that he has not run into this kind of problem with lower level units because those buyers barely afford them and they don't make many changes. Furthermore, the market time to resell a lower level unit is very small compared to a custom product. He pointed out that the developer doesn't normally record the plat until the unit is almost done because the statute states that the developer has to pay homeowners' association dues the month that the developer records the plat. Therefore, if a developer actually recorded a plat on a building that had the roof on and the mechanical in but there was four months to completion, the developer would be paying homeowners' association dues on each unit under construction, which makes it unaffordable to continue. "I support the changes that HB 470 is proposing, and I think that there's ... ethical and sound reasons to do that," he concluded. Number 297 CHAIR MURKOWSKI asked Mr. Peterson if he views [HB 470] as a precaution to make sure that this problem doesn't arise in the future. MR. PETERSON responded in the affirmative. He said that the current statute has never really made sense to him. Under the current statute, a developer who has agreed to build a custom unit for a buyer is stuck with that unit if the buyer decides, for any reason outside of the development, to move to Arizona and relieve himself/herself of the contract. He stated, "I believe that puts undue burden on the developer." He mentioned that although this hasn't happened to him yet, probability is not on his side. Number 311 REPRESENTATIVE ROKEBERG asked Mr. Peterson if he thinks that his decisions regarding which projects to pursue are influenced by the way the law is currently written. MR. PETERSON said, "Absolutely." He said that he built a high- end custom condominium project in Anchorage that was a financial disaster, but fortunately his lower-end units made up for that loss. He said, "Until some of these sorts of things get cleared up in statute, I am not interested in building a high-end unit that exposes me like that." Number 323 CHARLES SPINELLI, President, Anchorage Home Builders Association; and President, Spinelli Homes Inc., testified in support of HB 470. He addressed the language in HB 470 that reads, "up to 10 percent" penalty. He said that he has been concerned with this language since the day he put out his first public offering statement in 1992 or 1993 "when this bill arrived on our doorstep." He said that at that time he was doing public offering statements in Eagle Crossing Subdivision or Park View Terrace Subdivision, and the monthly dues were somewhere around $15 or $20. He explained that the dues were basically just to cover some landscaping and common area insurance around the project. Mr. Spinelli said, "The homeowners were liable for ... about $160 a month in dues and if, by chance, I had forgotten to present them with the public offering statement, my penalty would have been 10 percent of the house price." He said that in those days the average sales price was probably $160,000, so his penalty would have been $16,000. He stated, "I think that's 100 years worth of dues because I forgot to give them a public offering statement." MR. SPINELLI remarked that it is unfair to state that the developer will just pay the buyer 10 percent. He said that he isn't sure what procedure occurs to make that happen. Therefore, clarifying the language by adding the language "up to 10 percent" will make it "pretty clear that it's going to have to be judged on the merits of the case and that way everybody's treated fairly." Number 357 REPRESENTATIVE ROKEBERG mentioned that it seems that the courts would have to assess the 10 percent because clearly there would be a dispute over a breach of contract. He said that according to the statute the judge would have no choice but to award the 10 percent whether it was fair or not. He asked Mr. Spinelli if this is his interpretation. MR. SPINELLI replied, "Yes." REPRESENTATIVE ROKEBERG surmised, "So the reason for the 'up to' gives the judge the discretion to make an award based on the merits of the argument and the evidence presented in the courtroom." MR. SPINELLI agreed and said, "Sort of like the penalty should fit the crime." Mr. Spinelli related that this is his second time as the president of the Home Builders Association, which provides him with information about what's current and what's going on. However, those people living in remote areas across the state [may be] are advised by attorneys who may not know the ins and outs of UCIOA. Number 379 JESS HALL, Home Builder, said that he had the opportunity to learn about the Uniform Common Interest Ownership Act (UCIOA) about 6-8 months ago when he did a development for a subdivision in the [Matanuska-Susitna] Valley. He explained that he had an attorney draft up all the necessary documents because there was community property and he knew that he would have to set up a homeowners' association. However, after he was already in the project he found out that it actually fell under the UCIOA. After relating this to the attorney, the attorney said that he had never heard of [UCIOA] before. He talked to another attorney who also had no idea what UCIOA was either. "So that was a little concerning to me," he said. MR. HALL said that he ended up with an attorney in Anchorage who specialized in this, who worked back through the process, and informed Mr. Hall about the 10 percent figure in statute. This was pretty interesting because he already had the first phase of the subdivision 100 percent complete and all of the people had already moved into the houses. He asked, "Would it be the lot that we sold since that's kind of the part that has the common ownership, or is the house you attach to the lot?" He noted his support of the addition of the language "up to 10 percent". MR. HALL mentioned that if a developer makes a mistake it needs to be corrected. If it's going to go to a judge and jury, then they should probably decide where the mistake was. He pointed out that all of the documents that he provided to the homeowners were basically exactly the same as the public offering statement, although there were a lot more documents. He said, "Some of the stuff that we would have had the homeowners' association do themselves as the owners of the common property should have actually been done on a piece of paper ahead of time instead of after." Number 411 REPRESENTATIVE ROKEBERG asked Mr. Hall if he thinks medium or lower-end condominiums are affected by HB 470 and the UCIOA the same as high-end condominiums. MR. HALL said that he hasn't built any condominiums since before UCIOA was enacted. He recalled that the last time he "did one was under the Horizontal Property Regime Act," which was more simple. He offered that he thinks that there is probably more concern for a developer of luxury condominiums than there would be for a developer of lower-end condominiums simply because the lower-end condominiums would be easier to resell. He said: Same way in a subdivision. ... I do single-family houses with maybe a common park or whatever in there. We're under that same situation where we build the house, we didn't hand out -- even if we did a public offering statement and we left one paper out, or inadvertently missed a couple of documents in there, then technically it's not the public offering statement. It has to be everything. You could still end up in that 10 percent situation. I don't know whether the "substantially complete" part would apply over to PUD like it does a condominium. But there certainly is some cross over in there. Number 427 REPRESENTATIVE ROKEBERG asked Mr. Hall if he is still under UCIOA because he has a homeowners' association with detached houses. MR. HALL responded in the affirmative, and explained that this is because there is a piece of property that everyone in the subdivision owns collectively. REPRESENTATIVE ROKEBERG said, "The interpretation is that UCIOA applies to that type of an association." MR. HALL stated, "That's what the other attorneys told me." REPRESENTATIVE ROKEBERG interjected, "... POS and these other provisions and so forth also come into play?" MR. HALL responded, "Everything in that Act is going to come into play." REPRESENTATIVE ROKEBERG interjected, "The intention of the legislature when they did that was supposed to be condominiums, cooperatives, and PUDs, is what I understood." Number 438 MR. HALL said that he spoke with a developer from the [Matanuska-Susitna] Valley last night who is not aware of [UCIOA]. He said that the developer has built a subdivision with about 20 single-family houses on one-acre lots, but there is a common piece of property big enough to put a subdivision sign on. Mr. Hall explained that a homeowners' association is going to be formed to pay taxes and liability insurance for that plot of ground that is 8 by 10 feet. He said that this developer had no idea there was a UCIOA. He said: So he's sitting there with 20 sold houses with people living in them, with the 10 percent possibility [that] if 20 people decide to get together and hire an attorney, he's bankrupt. He'd just file his papers and be gone. I don't [believe] that quite fits the intent of where UCIOA was. Maybe it's because we're not in Anchorage and we're not as familiar with talking about, and having attorneys come into ... meetings and talk about UCIOA. ... And kind of learning that process, we're just now starting to learn it.... Number 450 CHAIR MURKOWSKI said, "Perhaps we should suggest to the bar association [that] they have a continuing legal education seminar on UCIOA out in the Valley." MR. HALL replied that he has made that suggestion a couple of times. Number 454 ROBIN WARD, Legislative Co-Chair, Alaska State Home Builders Association, said, "This needs a comprehensive change, but as you said, it's about 54 pages long." She mentioned that [the Alaska State Home Builders Association has] fast-tracked the two items that were of concern. She said: I have to tell you that I did a little checking just before I left Anchorage. Almost one-half of the listings in MLS [Multiple Listing Service] right now are new construction, and two-thirds of those fall under this Act. Almost all of our new subdivisions have some kind of common property, whether it's a sign, whether it's a greenbelt, something. We were doing an awful lot of what's called 'site condos planned communities'. All of those fall under the Common Interest Ownership Act. So this for us in Anchorage is tremendous. I will tell you that it is moving out, and as you can tell, to the Valley. At least those of us in Anchorage know the law fairly well. It's very complex and it's up to interpretation in certain areas. But these outlaying areas do not. And there's going to be some mistakes made, and I can see it happening. ... The probability ... is not on our side. ... A mistake will happen and it will happen very soon and it will be very, very costly for a developer. So we're begging your indulgence to work on this bill. Number 470 REPRESENTATIVE ROKEBERG requested that Ms. Ward "give a nutshell version of ... the [Horizontal Property Regime Act] that transitioned to UCIOA as a model act." MS. WARD said: This was uniform legislation, ... and basically ... we were one of the very first states, I think, to adopt it in 1984. ... It is very complex. There were basically no changes. It was just adopted. They came out with model adoptions and amendments in 1994. Uniform amendments that have never been changed here either. That's one of the things we've been looking at; ... taking those along with what we call local amendments, things that fit Alaska for what we do, and that's what will be in the comprehensive bill. But again, these were just the two that we pulled out that we felt needed to be fast-tracked. Number 481 REPRESENTATIVE ROKEBERG mentioned that he is very disturbed when a detached home subdivision with common area property falls under UCIOA. He said, "It is my understanding that ... the intent was to keep it to those specific types of developments rather than just having a homeowners' association." MS. WARD said, "Anything that has any common property, commonly owned by the owners of the subdivision or condominium. And a site condominium falls under that also, which we are building a lot of ... in Anchorage. All of that falls under..." REPRESENTATIVE ROKEBERG interjected, and inquired about site condominiums. MS. WARD explained that it's like a planned unit where one owns the house, but the land is owned by the [homeowners'] association. She said, "We can't do PUDs anymore, so we call them planned communities." REPRESENTATIVE ROKEBERG asked, "Is that because of the way that that statute was drafted under the model act?" MS. WARD specified that it's the way the uniform legislation was drafted. Number 500 REPRESENTATIVE CRAWFORD stated his support for HB 470. REPRESENTATIVE MEYER moved to report CSHB 470(L&C), version F, out of committee with individual recommendations and the accompanying zero fiscal note. There being no objection, CSHB 470(L&C) was moved from the House Labor and Commerce Standing Committee.
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