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.