Legislature(2001 - 2002)

04/02/2002 01:50 PM L&C

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= 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                                                                 
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                                                              
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                                                              
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                                                                   
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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