SB 143-COMMON INTEREST COMMUNITIES; LIENS  1:32:28 PM ACTING CHAIR STEVENS announced the consideration of SENATE BILL NO. 143 "An Act relating to horizontal property regimes and common interest communities; and relating to mortgages, deeds of trust, and other property liens." 1:32:40 PM SENATOR JOSHUA REVAK, speaking as sponsor, introduced SB 143 by reading the sponsor statement. [Original punctuation provided.] In 1986, the Uniform Common Interest Ownership Act (UCIOA) made major revisions to Alaska statutes governing Homeowners Associations (HOA's) and Condominium Owner's Association (COA's) in Alaska. However, two issues were not fixed by UCIOA when it passed and remain problematic for HOA's/COA's and the members of these communities to this day. SB 143 addresses these two issues and ensures that all associations, regardless of when they were formed, receive the same treatment. The first change SB 143 makes is to the process by which HOA's/COA's make amendments to their governing documents. As statutes currently stand, the process of amending an HOA's/COA's charter is so onerous that many associations are forced to continue operating with long-outdated rules. Unless a statutory change is made, these associations may be forced to operate under outdated and archaic standards forever. Unfortunately, this problem affects mostly older and often lower-income properties; the very properties that most need the protections provided by UCIOA. SB 143 does not eliminate the current amendment process, but instead provides a more reasonable alternative for associations who are unable to complete the process currently laid out. Secondly, when a home in an HOA/COA is abandoned, or the owners stop paying their regular dues, the HOA/COA (and thereby all the individuals who pay their dues) bear the cost of maintaining the property until the house is foreclosed upon. UCIOA grants all HOA's/COA's "super-priority lien status," which allows them to collect six months of outstanding HOA/COA dues from a bank holding a first lien on the property. However, in practice, the statute has been interpreted to not grant super-priority lien status to HOA's/COA's created before 1986 and UCIOA. SB 143 rectifies this decades old problem for pre-1986 associations and clarifies what is already in the statute to assure that pre-1986 HOA's/COA's will receive their super- priority lien just like their post-1986 counterparts. SB 143 will serve to benefit homeowners associations, condominium associations, common interest ownership communities, and the homeowners within those communities by providing an alternative to the overburdensome charter amendment process currently laid out in statute and assuring that even pre-1986 HOA's/COA's are compensated for the costs they incur to maintain homes that are not paying dues. SB 143 will directly benefit all dues-paying homeowners in HOA's/COA's and grant all HOA's/COA's, regardless of when they were formed, the same flexibility and rights SENATOR REVAK thanked the chair for hearing the bill and advised that his staff was available to walk through the sectional analysis. 1:36:01 PM SENATOR GRAY-JACKSON asked for further explanation of lienholders and notices. SENATOR REVAK explained that lienholders typically are banks and several dozen banks could hold liens in a single homeowner's association. Lienholders must be given notice and agree to any change an association proposes to its bylaws. For example, an association cannot update the amount it holds in escrow to pay for utilities unless every bank that holds a lien in that homeowners association agrees. In older associations that have not gone through the onerous task of updating the bylaws, that escrow amount may not come close to covering the actual cost of the utilities. Responding to a further question, he clarified that the bill does have to do with bylaws. The 1986 Uniform Common Interest Ownership Act (UCIOA) that changed Alaska statutes governing Alaska homeowners associations and condominium owner association is being interpreted to not apply to associations formed pre-1986 so they do not have the same opportunities as newer associations. SENATOR GRAY-JACKSON noted that he talked about bylaws but he also mentioned utilities. ACTING CHAIR STEVENS suggested Ms. Torkelson respond. 1:38:38 PM EMMA TORKELSON, Staff, Senator Josh Revak, Alaska State Legislature, Juneau, Alaska, explained that the reference to utilities was an example of an association that wanted to change an outdated rule in the bylaws. ACTING CHAIR STEVENS asked Ms. Torkelson to present the sectional analysis. 1:39:33 PM MS. TORKELSON presented the sectional analysis for SB 143. It read as follows: [Original punctuation provided.] Section 1 Amends AS 34.07 by adding a new section which lays out an alternative method for Common Interest communities formed before Uniform Common Interest Ownership Act of 1986 (UCIOA) to obtain lienholder approval of proposed changes to their governing documents. She noted that Section 3 inserts this same language in AS 34.08 so it affects associations formed post 1986. She continued: Under this section, pre-UCIOA communities who choose to use this alternative "shall send to a lienholder a dated written notice and a copy of the proposed amendment by certified mail, return receipt requested[.]" If the association complies with the written notice requirements and the lienholder does not respond within 60 days of the postmark date of the notice, "the lienholder is considered to have approved the proposed amendment." MS. TORKELSON clarified that this is not a repeal but an alternative method in case the lienholder does not respond to the written notice. 1:41:17 PM SENATOR MICCICHE offered that this does not sidestep what the homeowners want to do; it provides an alternative to the lienholder approval requirement. MS. TORKELSON agreed this only provides an alternative to the written consent requirement for lienholders. It does not change any requirement to get approval from the property owners in the association. SENATOR REVAK added that his office initially heard that lienholders did not want to commit to proposed changes to bylaws on homeowner associations in general, and particularly in writing. 1:43:40 PM MS. TORKELSON continued the sectional analysis: Section 2 Amends AS 34.08 to clarify that communities formed before UCIOA are granted super- priority lien status in the same way that their post- UCIOA counterparts are currently granted by AS 34.08.470(b). She restated that the existing statute granted super-priority lien status to all HOAs but it was interpreted to only include those formed post UCIOA, which passed in 1986. She noted that a list of 250 HOAs that are affected was in the bill packets. Section 3 Inserts the same language as in Section 1 to AS 34.08 by to provide an alternative method for Common Interest Communities formed after 1986 to obtain lienholder approval of proposed changes to their governing documents. Under this section, post- UCIOA communities who choose to use this alternative "shall send to a lienholder a dated written notice and a copy of the proposed amendment by certified mail, return receipt requested[.]" If the association complies with the written notice requirements and the lienholder does not respond within 60 days of the postmark date of the notice, "the lienholder is considered to have approved the proposed amendment." 1:45:23 PM VICE CHAIR STEVENS turned to invited testimony. 1:45:56 PM SARAH BADTEN, Counsel, Birch Horton Bittner and Cherot, Anchorage, Alaska, stated that she has been practicing community association law for about 15 years, helping homeowner and condominium associations interpret and enforce their governing documents. She has been approached by many associations that have been affected by the issues SB 143 addresses. She recounted that in Alaska, properties in condominium and homeowner associations that were built before the Uniform Common Interest Ownership Act (UCIOA) was adopted in 1986 are treated differently than property in associations built post-1986. Homeowners in pre-1986 communities are not able to change their declaration. Responding to the earlier committee discussion, she explained that the bylaws refer to how associations run their business. What the bill addresses are the recorded covenants on the property, which are also called the declaration or restrictive covenants. It is those documents that older communities cannot amend because lienholders must approve in writing any change to the declaration. Associations have two choices if the lienholders don't all respond; either they continue to operate under the old standards or they operate in non-compliance with the declaration. She stressed that she would not advise operating in non-compliance. MS. BADTEN stated that SB 143 resolves this problem by providing a process for notification to lienholders about any change to the declaration and an opportunity to respond. However, if the lienholders are silent, the association may proceed to make the change. MS. BADTEN also voiced support for the provision that clarifies that older associations have super-priority lien status just like associations created after 1986. Some banks currently are refusing to pay older associations any of the outstanding dues on properties that have been foreclosed, arguing that it would invalidate the declaration. SB 143 makes it clear that the same rules relating to lienholder status apply to both pre- and post- 1986 associations. She pointed out that older associations need this protection the most. Those buildings are more likely to be in need of repair and the homeowners are less likely to have the resources to pay additional assessments to offset unpaid dues. SB 143 will help these pre-1986 properties be able to provide the maintenance services the association is contractually required to provide under its declaration. This provides equal standing for both pre- and post-1986 properties. 1:50:45 PM SENATOR GRAY-JACKSON offered her understanding that changes to covenants need to be approved by the lienholders. MS. BADTEN clarified that the lienholder approval needs to be in writing. SENATOR GRAY-JACKSON noted that her homeowner association (HOA) was not on the list. MS. BADTEN explained that the list is not comprehensive; it only includes those condominium and homeowner associations that have the word "association" in the name. VICE CHAIR STEVENS observed that the list could be longer than the 250 identified in the material in the bill packets. MS. BADTEN agreed. SENATOR MICCICHE said he understands the problem and he has no issues with the bill. 1:53:32 PM SUSAN JENSEN, Operations Manager, Bayshore Owners Association Inc. (Bayshore), Anchorage, Alaska, concurred with Sarah Badten's testimony in support of SB 143. She stated that Bayshore was founded in 1974 and is comprised of 454 private homes so the association has to deal with at least that many banks. She related that Bayshore has wanted to amend its declaration a number of times through the years but was never able to do so because of the requirement to get written approval from all lienholders. For example, the outdated requirements in Bayshore's declaration limit the reserve to $20,000 despite infrastructure upgrades that would cost far more than that. Bayshore also lost the opportunity about 10 years ago for a $100,000 improvement that would have made it safer for children to walk to school using the association's green belts. The declaration did not allow it. Further, the association often loses out on dues and fees owed to it on properties that are awaiting sale or in foreclosure by the bank. In some instances the unpaid dues and fees amounted to $11,000 on individual properties. This debt is passed along to the innocent dues paying property owners. She urged the committee to pass SB 143 to protect older associations. ACTING CHAIR STEVENS listed the individuals available to answer questions. SENATOR MICCICHE summarized that SB 143 addresses the restriction that prevents older associations from changing their declaration by giving lienholders the opportunity to respond in writing to a proposed change within 60 days. If the responses are not forthcoming, the wishes of the members of the HOA will be honored. MS. JENSEN answered yes and added that the members of the association are thrilled that the bill was put forward. SENATOR MICCICHE said he wanted it to be clear that SB 143 is about honoring the rights of the individual homeowners. He referenced the list of 248 associations and noted that just seven were in non-compliance. He asked what the typical reason is for being out of compliance. 1:59:50 PM MS. BADTEN answered that associations that are not professionally managed may not file their biannual report to the state timely and will be out of compliance until the report is filed. 2:00:56 PM VICE CHAIR STEVENS asked Ms. Neseth if she had any comments. 2:01:11 PM PHOEBE E. NESETH, Esq., Director, Government and Public Affairs, Community Associations Institute stated that she submitted a letter that addresses how other states have incorporated provisions similar to those in SB 143. 2:01:55 PM ACTING CHAIR STEVENS opened public testimony on SB 143. 2:02:23 PM JASON HENNINGS, Chapter President, Community Associations Institute of Alaska, Anchorage, Alaska, testified in support of SB 143. He stated that he had managed community associations for about 10 years in both Anchorage and Wasilla. He has experience with both pre- and post-1986 HOAs and has found the collection methods fairly easy for those formed after 1986. This helps the capital reserves in an association over the long term. By contrast, there are past collections issues with older HOAs and the reserves can be inadequate to replace a roof or do other maintenance. He agreed with previous testimony that associations in less affluent areas are more likely to be affected. He stressed how difficult it is for older associations that are unable to change their declarations because the banks don't respond. 2:04:01 PM VICE CHAIR STEVENS found no further public testimony or questions from the committee and solicited the will of the committee. 2:04:11 PM SENATOR MICCICHE moved to report SB 143, work order 32-LS0211\I, from committee with individual recommendations and attached zero fiscal note(s). VICE CHAIR STEVENS found no objection and SB 143 was reported from the Senate Labor and Commerce Standing Committee.