MUST THE TENANT RATIO IN AN HOA BE DISCLOSED TO A LENDER?

Here is a question sent to me about disclosures when a sale occurs in an HOA.

“Escrow Sales HOA Demand Requests. During one of the seminars at the CACM Convention, one of the speakers (an association manager from Northern California) suggested management companies should not provide information about a condo to the lenders.  In particular owner vs. tenant ratio occupancy.

One of the Directors in an association I manage indicated management companies are not allowed to provide this information. I could not find any documentation concerning this issue in Davis-Stirling. Please provide any suggestions you have.”

There is a law in California that requires owners to disclose certain information TO BUYERS (not lenders) and the owner may – and usually does – through an escrow officer who issues an escrow demand – ask the association to provide the information on the owner’s behalf.  Thus, the association in essence has the owner’s authority to release information TO THE ESCROW OFFICER, NOT THE LENDER.

The REQUIRED HOA disclosures (to PROSPECTIVE PURCHASERS, NOT LENDERS) include:

Civil Code Section 4525.

(a) The owner of a separate interest shall provide the following documents to a prospective purchaser of the separate interest, as soon as practicable before the transfer of title or the execution of a real property sales contract, as defined in Section 2985:

(1) A copy of all governing documents. If the association is not incorporated, this shall include a statement in writing from an authorized representative of the association that the association is not incorporated.

(2) If there is a restriction in the governing documents limiting the occupancy, residency, or use of a separate interest on the basis of age in a manner different from that provided in Section 51.3, a statement that the restriction is only enforceable to the extent permitted by Section 51.3 and a statement specifying the applicable provisions of Section 51.3.

(3) A copy of the most recent documents distributed pursuant to Article 7 (commencing with Section 5300) of Chapter 6. [WHICH IS THE BUDGET, RESERVE STUDY AND POLICY STATEMENTS]

(4) A true statement in writing obtained from an authorized representative of the association as to the amount of the association’s current regular and special assessments and fees, any assessments levied upon the owner’s interest in the common interest development that are unpaid on the date of the statement, and any monetary fines or penalties levied upon the owner’s interest and unpaid on the date of the statement. The statement obtained from an authorized representative shall also include true information on late charges, interest, and costs of collection which, as of the date of the statement, are or may be made a lien upon the owner’s interest in a common interest development pursuant to Article 2 (commencing with Section 5650) of Chapter 8.

(5) A copy or a summary of any notice previously sent to the owner pursuant to Section 5855 that sets forth any alleged violation of the governing documents that remains unresolved at the time of the request. The notice shall not be deemed a waiver of the association’s right to enforce the governing documents against the owner or the prospective purchaser of the separate interest with respect to any violation. This paragraph shall not be construed to require an association to inspect an owner’s separate interest.

(6) A copy of the initial list of defects provided to each member pursuant to Section 6000, unless the association and the builder subsequently enter into a settlement agreement or otherwise resolve the matter and the association complies with Section 6100. Disclosure of the initial list of defects pursuant to this paragraph does not waive any privilege attached to the document. The initial list of defects shall also include a statement that a final determination as to whether the list of defects is accurate and complete has not been made.

(7) A copy of the latest information provided for in Section 6100. [RELATES TO CONSTRUCTION DEFECT DISPUTES.]

(8) Any change in the association’s current regular and special assessments and fees which have been approved by the board, but have not become due and payable as of the date disclosure is provided pursuant to this subdivision.

(9) If there is a provision in the governing documents that prohibits the rental or leasing of any of the separate interests in the common interest development to a renter, lessee, or tenant, a statement describing the prohibition.

(10) If requested by the prospective purchaser, a copy of the minutes of board meetings, excluding meetings held in executive session, conducted over the previous 12 months, that were approved by the board.

 (Amended by Stats. 2013, Ch. 183, Sec. 14. Effective January 1, 2014.)

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If you read the above statute carefully you will see that the owner occupancy (or tenant ratio) is not a required disclosure.

We’ve long known that disclosure of private information about the HOA to third parties could lead to liability for disclosing private information, for misstatements or reliance on disclosures that turn out to be incorrect or missing information. So we lawyers have long recommended considerable caution when asked to fill out lender questionnaires that ask all sorts of questions about information that is not in the above required information.

If we are talking about a lender asking about litigation, and there is litigation pending, or there is a small claims court action pending but nothing of the magnitude of a Superior Court action, care must be taken if ANY information about this is to be disclosed or withheld. We have generally recommended that the buyer must pay a fee to obtain a lawyer’s statement about litigation, if it exists, so the Board does not say the wrong thing. This applies to every situation where the lender is asking for sensitive information and the Board has to say yay or nay.

But honestly, the tenant ratio or owner occupancy ratio is something that that FHA and the secondary mortgage markets take into account and if the Board refuses to answer the question in an escrow demand, which is commonly asked, the lack of providing this information could thwart the loan process. So its important.

In past years to the extent management companies or boards were advised to disclose the percentage, they were also advised to protect the HOA from liability (because there was no way to get an accurate count without going door to door), and they were supplied with a particular “attorney waffle” statement that went something like this.

“We do not keep track of owner occupancy [or tenant] ratios because owners are not required to disclose whether their home is rented, but we can provide this information: ___ units have registered off site addresses for their communications.”

As of January 1 of this year, owners ARE required by law to disclose if their homes in HOAs are rented, to the board. Below is the new law: And HOAs ARE required to ask for it and to log it in their records before the Civil Code 5300 financial and policy statement disclosures are made (which is to occur sometime in the 30-90 day window before the end of the fiscal year). The law does not actually say that the Board is required to disclose the ratio to potential buyers, if asked in an escrow demand, but the requirement for the HOA to enter it into the HOA records prior to making the disclosures under Civil Code Section 5300 is significant, I believe. Because the 5300 disclosures do have to be provided to potential buyers in response to an escrow demand. Interestingly enough, the 5300 disclosures do not specifically include an owner-tenant ratio.  Is this an example of “inartful” drafting by legislators with a purpose in mind? Not sure.

But I believe that it is sufficiently indicative of an intent that the owner occupancy or tenant ratio be disclosed, to owners and to potential purchasers.

Here is the new law.

Section 4041 is added to the Civil Code, to read:

Civil Code Section 4041.

(a) An owner of a separate interest shall, on an annual basis, provide written notice to the association of all of the following:

(1) The address or addresses to which notices from the association are to be delivered.

(2) An alternate or secondary address to which notices from the association are to be delivered.

(3) The name and address of his or her legal representative, if any, including any person with power of attorney or other person who can be contacted in the event of the owner’s extended absence from the separate interest.

(4) Whether the separate interest is owner-occupied, is rented out, if the parcel is developed but vacant, or if the parcel is undeveloped land.

(b) The association shall solicit these annual notices of each owner and, at least 30 days prior to making its own required disclosure under Section 5300, shall enter the data into its books and records.

(c) If an owner fails to provide the notices set forth in paragraphs (1) and (2) of subdivision (a), the property address shall be deemed to be the address to which notices are to be delivered.

Bottom line, managers are NOT required to fill out lender disclosure forms. But I believe disclosure of all the items listed above under 4525 AND the owner occupancy ratio (or tenant ratio) according to the receipt of information from the owners does need to be disclosed.

Next, of course, is the question of what happens if owners ignore the Board’s request for the information about whether the unit is rented?

Stay tuned. Sign up for the E-newsletter at www.californiacondoguru.com because the next edition is on this specific topic. It is all about the whys and wherefores of sales disclosures, including more on liability and how to respond to demands of buyers, lenders, etc.

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