Legislature(2001 - 2002)
04/02/2002 01:50 PM Senate L&C
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* first hearing in first committee of referral
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= bill was previously heard/scheduled
HB 470-COMMON INTEREST OWNERSHIP:OFFERING STMTS
CHAIRMAN BEN STEVENS called the Senate Labor & Commerce Committee
meeting to order at 1:50 p.m. and announced HB 470 to be up for
consideration.
REPRESENTATIVE ROKEBERG, sponsor of HB 470, said there is an
anomaly in the state's common ownership act that was brought to
his attention by a constituent of Senator Torgerson's.
That being during the construction of condominium type
developments, it's necessary under our statute to
provide a public offering statement which requires
certain specific information including such things as a
legal description and other technical matters, which in
fact cannot be fully completed until the unit itself is
completed. What the circumstances were in the Land's
End area of Homer were that high end condominiums were
being built on the two as-built, to-be-built custom
build bases in the cost range of half million to
$750,000, but because of the peculiarity of our
statute, the delivery of the public offerings ticket
couldn't occur until after the units were complete and
at that time, under our statute, the buyer had the
opportunity to back out of the deal. And on top of
that, he had the opportunity to collect 10% of the
value of the transaction. In other words, somebody
could bargain for a very costly unit, back out of the
deal, break his [indisc} contract and thus be rewarded
by our statute to the tune of $75,000.
What this bill does, Mr. Chairman, is fix that little
anomaly by providing that a preliminary public offering
statement be provided which is very similar in nature
to the final product and also indicates if there is any
award to be made by the courts that it could be up to
10%, not specifically 10%. Therefore giving the judge
the ability to look at the circumstances and facts of
the case.
SENATOR LEMAN said this was a revision to the Uniform Common
Interest Ownership Act and asked if this was one of the uniform
acts that they have adopted that's common across the United
States.
REPRESENTATIVE ROKEBERG replied yes, that he had been working on
a revision with the homebuilders for about three years.
SENATOR LEMAN asked if it was likely that other states would have
the same anomaly unless they had revised the Uniform Act.
REPRESENTATIVE ROKEBERG replied that this usually doesn't come to
light, because mostly when townhouse type condominiums are put
together and marketed, they're not as high ended. So, there's not
as much risk on the part of the developer if the transaction
doesn't close.
This becomes very glaring when you have a high-end
resort type condominium situation, like you do at the
Land's End on the Homer spit, which the letter in the
packet comes from, Mr. Johnson Faulkner, and the
details of that particular plight that he is in.
SENATOR AUSTERMAN asked him to explain how this Act is different
than one from a typical homeowner who custom builds a house.
REPRESENTATIVE ROKEBERG replied that in Alaska the first
statutory act they had was the Horizontal Regime Act, which
allowed for the sales, marketing and legal conveyance of a
condominium or a townhouse and that was superceded 18 years ago
by the Uniform Common Ownership Act and all the newer ones are
under the Common Ownership Act that sets up a different estate in
land where you can convey fundamentally, airspace. for example a
condo can be high rise building and the conveyance of title is
only to any particular unit within that particular building.
SENATOR AUSTERMAN said a single unit home is a contract based
upon building a house, a finite deal and asked if he was saying
that a townhouse is not a finite deal.
REPRESENTATIVE ROKEBERG explained that you could have stand-alone
property and fee simple and the ownership [indisc] fee, but they
have no common ownership. He said it was not uncommon for
detached single-family homes to have homeowner's associations
that may own some land in common.
SENATOR AUSTERMAN said that the high-end complexes are based on
the same decisions as the lower end ones. In more simplistic
terms he thought this sounded like they were protecting them from
themselves.
REPRESENTATIVE ROKEBERG responded:
I think what we're doing is facilitating commerce,
here. What we have is a circumstance where it's an
entirely unilateral right of the consumer or the buyer,
could have the right not only to back out of the
contractual obligations by statute, but they even have
the ability to profit here. It's kind of an unusual
circumstance.
MS. ROBIN WARD, Co-chair, Legislative Affairs, Alaska
Homebuilders Association, said she is a professional association
manager for common interest properties and that they support this
bill. She said there was a model amendment of this Act that was
also enacted in 1994 and this needed to be taken care of in the
state of Alaska.
These are two issues that have really plagued us this
year especially and we felt like we needed to fast-
track these. We pulled these two out of the large bill
to work on. Part of the problem is that the risk is
higher in the higher end units, but the risk is the
same for all developers when they can basically get to
the closing table and someone can back out. It really
does hurt on the financing side of it, but again I'll
let Mr. Faulkner talk a little bit about that.
One of the reasons this is happening this year is that they are
building a lot more of them right now. In Anchorage almost half
of the listings are new construction and half of those fall under
the Community Uniform Common Interest Ownership Act in one form
or another.
Even today in our subdivision, if there is a small
piece of land where a sign sits or any kind of a green
belt, it triggers this law…
In Anchorage the developers are fairly well versed in this law,
but one of the things they're finding out is that in out-lying
areas common interest properties haven't been built before and
they're not aware of this law.
MR. JESS HALL, Mat-Su Valley Builder, said he and a few others
had done developments out there and have found that they had done
condos in the mid-80s that had fallen in the Horizontal Property
Regimes Act. Since then there hasn't been too much of that kind
of building going on. More recently he did a subdivision, but it
wasn't in exactly the right form to be called a public offering
statement and if you don't hand out a public offering statement,
you're liable for 10% of the sale price of the property. His
development is all single-family fee simple and there are no
common elements in terms of the houses that can be built or the
lot sales, but the water system is common and falls under this
act. This act could also apply to a tiny piece of property of 10
x 10 with a subdivision sign on it. If a public offering
statement was not given to each of the homeowners, they are
liable for 10% of the sales prices of their house. He thought it
made sense to at least go to a point where a judge could state
what the real cost was of negligence was on the part of the
developer. He added that more revisions were needed than just
this one Representative Rokeberg mentioned.
MR. CHUCK SPINELLI, Anchorage Homebuilders Association, said he
had been building in Eagle Crossing Subdivision for the last 15
years and although the look of the whole subdivision hadn't
changed much, the law has. In the beginning they didn't have to
worry about public offering statements and there was some land
held in common, green belts, etc. and people were paying about
$15 - $20 per month. When the UCIOA law came through, they were
inundated with regulations and expense. The new sections at Eagle
Crossing cost about $5 - $7,000 to create this monster 2 inch
thick volume of work called the public offering statement. For
every one they hand out to a buyer, it costs another $175 per
copy. It basically describes the CT&R for the subdivision, etc.
and at the very end, it tells them the amount of dues they should
expect. At Eagle Crossing the dues are generally less than $15
per month. In most of the sections they have reserved development
rights and have never collected any dues, but in the event that
they do collect them, they'd be about $180 per year. The penalty
for not advising people that they were going to be responsible
for $180 per year for dues would be 10% of the home price. Their
average sales price is $180,000, which would make about $18,000.
This would be the penalty if they forgot to give someone a public
offering statement. He also said that current statute doesn't
outline how the amount is remitted.
He concluded that he supported HB 470 although more work was
needed to be done on the Act.
MR. JOHN FAULKNER, President, Land's End Development Corporation,
said he is developing a high-end custom condominium project
adjacent to land at the resort at the tip of Homer Spit. He saw
this as a clarification, not a substantive change.
The clarification is needed because the law is unclear
and this does not serve anybody's interests. The reason
it's unclear is that you can give a public offering
statement to a buyer in full compliance with the intent
of the act, let's just say, in July, and the 15 day
clock starts to run. You can have the mutual intent to
build a high-end custom condominium, proceed with
construction financing and construction all the way
through completion and then you have to survey the
building - and I want to go back at this point to Mr.
Austerman's question about what is different between a
condominium and a typical home. One of the differences
- we have to survey these things, we have to survey the
blocks, the airspace that Representative Rokeberg was
referring to. We need that survey to go into the final
recorded document that really defines the person's
legal description. That, in turn, is used to determine
their percentage of ownership of these common areas.
So, back to my original scenario where this 15-day
statutory requirement of the right of rescission, let's
call it, starts to run in July. You build the building,
you get to closing or get to the point of completion
and you have to survey and finalize your declaration
and update your public offering statement to reflect
that finality or that final square footage allocation
that determine ownership. In a lot of cases they're the
same. It doesn't change, but custom homes that change
during construction can alter things. The point I'm
trying to make here is that the law is not clear that
you can issue a POS in good faith and full compliance
with what I believe is the intent, yet get to final
completion and a buyer could technically argue that
this public offering statement is not the original
public offering statement and the 15-day clock starts
at this point, i.e. after construction and, therefore,
they have a right of rescission when as a developer,
you have 100% invested. So, that is what Representative
Rokeberg's bill HB 470 does. It clarifies that the
original public offering statement is issued in good
faith and is substantially the same as what is finally
recorded and you're in compliance with the law. I think
that serves the consumer's best interest. I think it
serves general commerce best interests and the best
interests of all parties. I'll say one other thing and
that is really don't think the framers of this law
intended a buyer to be able to back out of a deal at
the eleventh and a half hour. So, I can't imagine that
something that onerous was the original intent.
Back when this law was framed, I believe condominium
development was really confined for the most part to
large say - 50 unit plus buildings that were not as
customized and certainly less expensive than what I'm
doing. So, loosing one deal maybe at the eleventh hour
wasn't as onerous to a developer or as damaging, but
clearly, I'm building three at a time and my bank is
certainly aware of this loophole and it has impacted my
ability to get financing to the point where they're
requiring unreasonable amounts of cash, in some cases,
100% to be set aside in escrow with absolutely iron-
clad language that restricts a buyer's ability to back
out. So, it is impeding commerce at this point and I
believe it's a needed clarification and one that we
deserve because I can't imagine the intent of this
language was to allow a willing buyer and a willing
seller to come to an agreement before custom
construction and then again at the eleventh hour decide
some minor revision that couldn't be avoided that they
have the right to back out.
CHAIRMAN STEVENS asked if the bank brought this to his attention.
MR. FAULKNER replied that this was pointed out by his attorney,
Sandra Wicks, one of the most knowledgeable about the Common
Ownership Act. It has never been litigated. "The problem is that
the probability, as low as it might be, times the risk of it
happening is absolutely still disproportional…"
He said it may happen once in a million years, but that one time
it's going to happen, it's going to devastate the developer.
CHAIRMAN STEVENS asked if anyone had had a problem with this that
he knew of.
MR. FAULKNER said he didn't know of anyone, but he thought it was
a "prudent precaution."
SENATOR LEMAN moved to pass CSHB 470(L&C)(title am) out of
committee with individual recommendations and the accompanying
fiscal note. There were no objections and it was so ordered.
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