SB 45-EXEMPTION: LICENSING OF CONTRACTORS  CHAIR COSTELLO announced the consideration of SB 45. She advised that the intent is to hear the bill, take public comment, and hold it for further consideration. 1:34:54 PM JULIANA MELIN, Staff, Senator Mia Costello, introduced SB 45 on behalf of the Senate Labor and Commerce Committee paraphrasing the following sponsor statement: Senate Bill 45 provides better protections for consumers purchasing a home from an unlicensed builder. Following the housing market crash of the 1980s, the Alaska State Legislature raised the standards for homebuilders. Residential contractors were required to obtain a state-license, a residential endorsement, bonding, and insurance. In addition, programs on energy ratings and efficiency were established through the Alaska Housing Finance Corporation. These efforts helped Alaska develop a home construction industry that offers quality options for home buyers that are efficient and affordable. Currently state law provides an exemption that allows individuals to build structures without a contractor license. Alaska law AS 08.18.161 allows anyone to build one structure every two years without a license. While the exemption was intended to allow Alaskans to build their own home, the industry is seeing a growing number of individuals using the exemption to operate construction businesses. In 2013, the Mat-Su Home Building Association estimated that almost one-half of all new construction home sales in their area were from unlicensed construction companies. Without a construction contractor license, unlicensed builders avoid requirements for bonding and insurance that apply to licensed builders. The wording of the exemption creates enforcement problems and allows for potential abuse by those who would seek to build homes for sale without the required state license. Senate Bill 45 helps prevent abuse of this exemption. The bill would require anyone who builds and sells a home without a contractor license to disclose the fact that they do not have a license to the state within two years of completing construction. Senate Bill 161 does not prohibit owner-builder construction or require any form of state approval, it simply calls for disclosure to the Department of Commerce, Community & Economic Development for builders selling structures without a license. SB 45 is supported by the Alaska State Home Building Association. 1:37:06 PM MS. MELIN provided a sectional analysis for SB 45. Section 1 adds the following legislative intent language: It is the intent of the legislature that the exemptions listed in AS 08.18.161, as amended by sec. 3 of this Act, be construed broadly to allow individuals the freedom and ability to construct and sell their own homes based on their own discretion. Section 2 adds a new subsection (b) clarifying when the Department of Commerce, Community and Economic Development should investigate whether a home builder who has listed his house for sale is operating a business for which he/she would need a contractor's license. Section 3 makes a series of technical changes that appear on page 2, lines 22-30. They make conforming changes and add language that clarifies the exemptions. Language is added on page 3, lines 2-6, to clarify that a disclosure must be filed with the state if an owner sells a structure or advertises it for sale within two years after construction begins. Section 4 adds an applicability section. For the purposes of this law, it defines beginning of construction as either when construction begins on a structure or when an owner enters into an agreement with another person to provide labor, act as a sub- contractor, or provide materials for construction. MS. MELIN listed the individuals available to testify and answer questions. 1:39:28 PM SENATOR GARDNER said she likes the bill but wonders what the consequences are for somebody who fails to comply. MS. MELIN deferred the question to Ms. Hovenden with the Division of Corporations, Business and Professional Licensing. SENATOR GARDNER said she reviewed the testimony from last year when similar legislation was heard, and some people indicated that the bill would have greater impact in rural Alaska where there is less access to licensed builders. She asked if there has been pushback from that area. MS. MELIN replied some of the contractors will address the effect in rural areas in particular. 1:40:48 PM SENATOR MEYER asked how this bill differs from the one last year. MS. MELIN said the primary difference is that SB 45 defines the two-year timeline as starting with the beginning of construction. The bill last year was ambiguous in that regard. SENATOR MEYER asked why the bill didn't pass last year. MS. MELIN deferred the question. CHAIR COSTELLO invited Ms. Hovenden to comment on the bill. 1:42:08 PM JANEY HOVENDEN, Director, Division of Corporations, Business and Professional Licensing, Department of Commerce, Community and Economic Development (DCCED) responded to Senator Gardner's question about the penalty for failing to comply with provisions in the bill. She explained that circumventing the home builder's law would fall under unlicensed practice in Title 08. SENATOR GARDNER asked her to describe the consequences. MS. HOVENDEN offered to follow up with the information. SENATOR MEYER expressed interest in getting that information. He asked if the zero fiscal note is realistic given the potential need to investigate. MS. HOVENDEN said the qualifier is the language that says, "when circumstances indicate that the owner is operating a business for which the owner is required to register." Any irregularity would have to come to the division's attention and that is happening now. She anticipates this form could be downloaded from the division's website. Because the forms would be from homeowners rather than licensees, the names would be listed in an Excel spreadsheet and could be searched that way. SENATOR MEYER asked how the two-year timeframe came about. MS. HOVENDEN said she didn't know. 1:45:33 PM SENATOR STEVENS noted that the committee heard that in 2013, half of the construction in Mat-Su involved unlicensed builders. He asked if she has statistics on the number of unlicensed builders statewide. MS. HOVENDEN said she did not have statistics on unlicensed builders in Mat-Su or statewide. 1:46:12 PM SENATOR HUGHES asked how the penalties compare to the cost of the license and if there is anything to prevent repeat offenses. MS. HOVENDEN offered to follow up with an answer. 1:46:56 PM CHAIR COSTELLO opened public testimony on SB 45. 1:47:21 PM AARON WELTALEN, President, Alaska State Home Building Association and President, Interior Alaska Building Association, testified in support of SB 45. Responding to an earlier question about why the bill didn't pass last year, he said the sponsor opted to pull the bill. He said these associations support the bill to ensure that people can't build home after home without a license or bonding. He emphasized that this is in the best interest of consumers. SENATOR STEVENS asked if the two-year window couldn't be circumvented easily by starting excavation then waiting a year and one-half to start building. MR. WELTALEN said it's been a difficult issue, but he is satisfied with the two-year timeline in SB 45. CHAIR COSTELLO clarified that the bill went through the process in the Senate and the sponsor withdrew the bill on the House floor. 1:49:20 PM JEFF TWAIT, licensed builder, Kenai Peninsula Builders Association, testified in support of SB 45. He said a lot of work has gone into this bill and it's time it passed. Other than this being a consumer protection bill, it levels the playing field by ensuring that people who build homes as a business adhere to the licensing and bonding requirements. It's a matter of fairness. 1:50:31 PM BRANDON SNODGRASS, Director, Alaska State Home Building Association and Treasurer, Anchorage Home Builders Association, testified in support of SB 45. He said he is also in charge of construction lending for First National Bank Alaska and has seen the ramifications of owner-built homes on consumers. Last year someone who was using a licensed builder applied for a loan but couldn't be accommodated because the appraisal only used comparables that were owner/builder homes and all of them had sold for quite a bit below market. He opined that as more and more homes built by unlicensed builders go on the market, all home values will be affected. It will also make it more difficult to obtain financing. SENATOR STEVENS asked if all licensed contractors are members of the Alaska State Home Building Association. MR. SNODGRASS answered no SENATOR STEVENS said he would like to see where the licensed contractors are located and the size of communities where there are few to no licensed contractors. He acknowledged that wouldn't be Mr. Snodgrass's purview. MR. SNODGRASS said the Department of Commerce, Community and Economic Development would likely have that information. He disclosed that he has financed homes for owner/builders for the purpose of selling when it makes sense. He also described a situation where a group was obviously skirting the rules and getting preferential treatment. 1:54:45 PM CHAIR COSTELLO asked what recourse a family has after they have taken possession of an owner-built home and there are problems. MR. SNODGRASS said there is no recourse if the builder is unlicensed. CHAIR COSTELLO asked if the requirement for an owner/builder to fill out a form and submit it to the department is overly onerous. MR. SNODGRASS answered no, it's nothing compared to what he requires for them to get a loan. 1:55:39 PM SENATOR GARDNER observed that passage of this bill would increase the cost of new homes for everyone. MR. SNODGRASS opined that it will return prices to the level they should be. He added that homes built by licensed builders are generally a better product. SENATOR GARDNER asked if an owner/builder who is not a licensed contractor is able to offer workers' compensation benefits and insurance coverage to someone working with him/her; and if the owner/builder can offer a warranty that has backing. MR. SNODGRASS said he didn't know for sure.  1:58:11 PM SENATOR HUGHES asked if bankers and mortgage lenders will be watching to ensure the owner/builder files the required form because some people may not be aware it is a requirement. MR. SNODGRASS said he's not in the mortgage business, so he didn't know if that's something they'd track. 2:01:06 PM At ease 2:02:33 PM CHAIR COSTELLO reconvened the meeting and recognized Patrick Dalton as the next testifier on SB 45. 2:03:18 PM At ease due to technical difficulties 2:06:36 PM CHAIR COSTELLO reconvened the meeting and asked Mr. Hébert to respond to Senator Gardner's earlier questions. 2:07:29 PM JACK HÉBERT, Chief Executive Officer/Founder, Cold Climate Housing Research Center, Fairbanks, Alaska, said he has been a licensed general contractor with a residential endorsement for 40 years. SENATOR GARDNER asked if he agrees with testimony last year that the bill would have a greater effect in rural communities because there are fewer licensed builders. MR. HÉBERT said he didn't believe so; in rural areas, most of the building other than by owner/builders is done by the housing authorities. SENATOR HUGHES asked if there is any concern that energy efficient homes that are built by an unlicensed builder might have ventilation problems that cause health issues. She noted that this might be another consumer protection aspect. MR. HÉBERT said that is a huge problem in both newer, tighter homes and older homes that have poor ventilation. Solving the problem is a matter of education and understanding that good indoor air quality is essential. The Cold Climate Housing Research Center has developed affordable systems such as brHEAThe that provides fresh air and high efficiency heating in an energy efficient building. SENATOR HUGHES ask if there is a problem that Alaskans unknowingly buy homes with poor air quality because some owner/builders don't have the training and put in ventilation systems incorrectly. MR. HÉBERT said there are thousands of homes in Alaska that have poor ventilation because of poor building science and lack of builder education. It's particularly problematic when a builder uses part of a technology but not the whole package. That's why licensed contractors are required to take continuing education in several areas including ventilation. SENATOR HUGHES commented that we can conclude that people who repeatedly sell their owner-built homes probably aren't getting adequate training increasing the potential that Alaskans are living in homes that don't have good air quality. MR. HÉBERT added that the home is likely going to be unhealthy throughout the life of the building. SENATOR STEVENS asked how many hours of training it takes to become a contractor. MR. HÉBERT said 16 hours of continuing education is required every two years. 2:13:58 PM PATRICK DALTON, representing himself, Delta Junction, testified in opposition to SB 45. He said he has no problem with this type of regulation in the organized areas of the state, but he would like an exemption for people living in the unorganized areas of Alaska. He said the people that live in the unorganized areas are different. "There is more of a liberty mindedness out here ... and we appreciate the absence of regulation." He maintained that imposing unnecessary regulations on people that don't want it will cost the state money. Requiring people to fill out paperwork when they sell their house is going too far, he said. He pointed out that the legislature sits as the assembly for the unorganized borough and as such has the responsibility of representing that population and listening to their requests. He suggested providing incentives to get people to do a good job when they build instead of passing unwanted regulations. 2:18:08 PM PAUL MICHELSOHN JR., Alaska State Homebuilding, and Anchorage Homebuilder Association, testified in support of SB 45. He refuted the previous testimony arguing that the unorganized areas need this type of regulations more than the organized areas. He cited examples of problems he has seen when people purchased owner-built homes. The first was a 14-month-old home outside of Wasilla that had a failed septic system. Upon further investigation he found some of the floors were out of level and the walls were out of square. The builder of record could not be found and the cost to replace the septic system and bring the floors and walls up to standard cost about $23,000. The second example was a home outside Soldotna in the unorganized borough. This was the third house that owner/builder had sold. He was asked to inspect the home and found 18 code infractions. These included no bolts fastening the house to the foundation, a bedroom egress window that was too small to meet fire codes, and an undersized gas pipe to the house. He said he didn't know if the house sold, but if it did it was probably a cash sale. MR. MICHELSOHN said those are the kinds of issues that arise when builders are unlicensed, and it's the end user that suffers the consequences. Referring to earlier questions, he agreed with Mr. Hébert that indoor air quality is a serious issue and that continuing education is critical to ensure the health and safety of the end user. When problems arise it's generally a matter of the building not being constructed to code and there is usually zero recourse other than filing a civil lawsuit. Referring to Senator Steven's question, he said the two-year timeline was a compromise. The problem with the bill last year was that the starting point for the timeline was subjective. SB 45 establishes that the timeline starts at the beginning of the project, which is customarily when the footing and foundation is put in place. He urged the committee to pass the bill, adding that it should have happened last year. 2:28:08 PM CHAIR COSTELLO asked if his understanding is that the bill places no additional requirements on an owner/builder who builds his/her own home. She cited the new language on page 3, lines 2- 6, that requires the owner/builder to file a form with the department indicating that they are "not engaged in a business for which the owner is required to register as a contractor under this chapter;". She asked if he agrees that other than dating, signing, and filing the form no other requirements are imposed on the owner/builder. MR. MICHELSOHN said that's correct. He added that the legislature not only sits as the assembly for the unorganized borough, it also sits as the representative of all the citizens of the state. Thus it sits to represent the uneducated buyers of these homes. The bill simply clarifies the rules for owner/builders who sell their home and are not registered as a contractor. CHAIR COSTELLO asked if he agrees that the bill does not provide a penalty. Filing the form with the department simply provides information for consumer protection purposes. MR. MICHELSOHN said he understood the department representative say she didn't know if there was a penalty but would follow up with an answer. He said he believes there should be a penalty, but he didn't want to slow the bill by suggesting that that amendment. CHAIR COSTELLO asked if owner/builders are unique to Alaska or if this is an issue in other states. MR. MICHELSOHN said the requirements vary, but the issue is not as prevalent in other states. SENATOR HUGHES asked if there would be a penalty for innocent lack of knowledge of the requirement if the person clearly was not engaged in a business. She expressed hope that those individuals would not be penalized; they would just be asked to submit the form. MR. MICHELSOHN said he didn't know but he believes that infractions tend to occur when there isn't a penalty for an infraction. SENATOR HUGHES clarified that she is asking about a person who is not running a business but must sell within the two-year timeframe. MR. MICHELSOHN said he believes the bill has a provision to addresses that. CHAIR COSTELLO asked Ms. Bruce to respond to the last two questions. 2:35:56 PM LINDA BRUCE, Attorney, Legislative Legal Services, Legislative Affairs Agency, Alaska State Legislature, said this version of the bill does not include anything related to an exception to the exemptions [listed in AS 08.18.161}. Regarding the penalty, she said it appears that a person who didn't submit the form could be issued a citation for a violation under AS 08.18.117. SENATOR HUGHES asked what the fine would be. She clarified that she was talking about a well-meaning person who was not engaged in a business and didn't know to submit the form. MS. BRUCE said she couldn't answer that at this time, but it would be minimal. SENATOR GARDNER said she isn't sure there is any consequence whatsoever for violating the statute should the bill pass. Someone could get a citation and go on and build another house. MS. BRUCE explained that if the department investigated and found the owner was running a business without registering as a contractor under that chapter, additional provisions might apply. For example, the department could issue an administrative fine or petition the superior court to issue a civil penalty or injunction. Under certain facts the person may be guilty of a class B misdemeanor. 2:39:10 PM SENATOR GARDNER asked if adding language authorizing a penalty would result in a positive fiscal note. MS. BRUCE deferred the question to the department. SENATOR STEVENS said he, too, would like more information because cities and boroughs also have building codes. In his community substantial fines are attached to those violations. MR. MICHELSOHN offered to serve as a resource to the committee members going forward. 2:40:39 PM CHAIR COSTELLO closed public testimony on SB 45 and held the bill in committee.