STAND. COM. REP. NO. 1187

                                   Honolulu, Hawaii
                                                     , 1999

                                   RE:  H.B. No. 1276
                                        H.D. 1
                                        S.D. 1




Honorable Norman Mizuguchi
President of the Senate
Twentieth State Legislature
Regular Session of 1999
State of Hawaii

Sir:

     Your Committee on Government Operations and Housing, to
which was referred H.B. No. 1276, H.D. 1, entitled: 

     "A BILL FOR AN ACT RELATING TO CONDOMINIUMS,"

begs leave to report as follows:

     The purpose of this measure is to clarify and update
investment parameters for association funds by:

     (1)  Allowing condominium associations and their managing
          agents to deposit association funds in out-of-state
          financial institutions;

     (2)  Permitting the deposit of funds with securities brokers
          who have an office in Hawaii; and 

     (3)  Prescribing the permissible investments for association
          funds.

     Prior to the hearing, your Committee circulated a proposed
Senate draft.  Testimony was received on this proposed H.B.
No. 1276, H.D. 1, S.D. 1. 

     The proposed H.B. No. 1276, H.D. 1, S.D. 1, deleted from the
measure as received, language allowing condominium associations
and their managing agents to deposit association funds in out-of-
state financial institutions.  The proposed H.B. No. 1276,
H.D. 1, S.D. 1, added to the measure as received, language which:

 
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     (1)  Clarifies that projects created and established as
          condominium property regimes are subject to county land
          use zoning ordinances and development requirements;

     (2)  Establishes a fair market value standard for
          negotiating the value of the leased fee interest to be
          purchased by a lessee; 

     (3)  Clarifies the powers of the boards of directors of
          associations of apartment owners to enter into purchase
          agreements with lessors;

     (4)  Adds two additional seats to the Real Estate Commission
          who represent the interests of condominium governance
          organizations and prohibit the use of the education
          fund for purposes other than the condominium education
          fund; and

     (5)  Grants condominium associations authority to terminate
          common utilities after establishing policies and
          informing tenants; establishes a six-month priority
          lien when maintenance fees have not been paid on a
          condominium; requires the mortgage holder to pay
          maintenance fees of a foreclosed condominium; and
          permits condominium associations to deposit funds in
          credit unions located in the State.

     Testimony on this proposed H.B. 1276, H.D. 1, S.D. 1, was
received as follows: 

     (1)  Testimony in support of the section requiring
          condominium property regimes to be subject to county
          land use regulatory law and codes was received from a
          member of the Kona Community Action Group to Address
          Flooding, Hawaii's Thousand Friends, and one
          individual.  Testimony in support with amendments was
          received from the Department of Business, Economic
          Development and Tourism, Department of Planning and
          Permitting for the City and County of Honolulu, and one
          individual.  Testimony opposed to this section was
          received from Hawaii Association of Realtors,
          Oceanfront Realty International Inc., Vision
          Properties, Inc., Moloaa Nui Lands, Land Use Research
          Foundation of Hawaii, Kilauea Management Company,
          Pacific Paradise Properties Corp., and three
          individuals;

     (2)  Testimony in support of the section on establishing a
          fair market value standard for appraising leased fee

 
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          interest was received from the Hawaii Council of
          Association of Apartment Owners;

     (3)  Testimony in favor of the section allowing condominium
          associations to enter into purchase agreements with
          lessors was received from Hawaii Council of Association
          of Apartment Owners, Community Associations Institute,
          and one individual;

     (4)  Testimony in favor of the section adding two additional
          seats to the Real Estate Commission to represent the
          interests of condominium associations and prohibiting
          the use of the condominium education fund for purposes
          other than the condominium education fund, was received
          from Hawaii Council of Association of Apartment Owners
          and the Community Associations Institute.  Testimony
          opposed to this section was received form the Hawaii
          Association of Realtors;

     (5)  Testimony in favor of the section granting condominium
          associations the authority to terminate common
          utilities; requiring the mortgage holder to pay
          maintenance fees of a foreclosed condominium;
          establishing a lien for unpaid common expenses with a
          six month priority lien; and permitting condominium
          associations to deposit funds in credit unions located
          in the State, was received from Hawaii Council of
          Association of Apartment Owners, Community Associations
          Institute, Hawaii Association of Realtors, and a member
          of the Board of Directors of the AOAO Makakilo Hale 1.
          Testimony in favor with amendments was received from a
          member of the Board of Directors of the Association of
          Apartment Owners of the Villa on Eaton Square.
          Testimony opposed to this section was received from the
          Hawaii Bankers Association, Hawaii League of Savings
          Institutions, and the Mortgage Bankers Association of
          Hawaii; and 

     (6)  Testimony in support of the section of the measure
          expanding where condominium association funds may be
          deposited was received from Hawaii Council of
          Association of Apartment Owners, Community Associations
          Institute, and Hawaii Association of Realtors.
          Testimony opposed to this section was received from
          Hawaii Independent Condominium and Cooperative Owners.


 
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Condominium Property Regimes Compliance With County Land Use
Policies

     Your Committee finds that that county land use ordinances
and regulations ensure that a site is suitable for a proposed
project, in terms of its impact on traffic, drainage, and other
important services, and that cumulative project impacts on the
physical environment and the surrounding community are adequately
addressed.

     Your Committee finds that currently there exists a lack of
clarity in the counties' authority over the uses and development
proposed by condominium property regimes.
     
     Your Committee finds that the lack of clarity in the
condominium property regimes statute has been a barrier to county
efforts to effectively manage the land use impacts of certain
types of condominium property regime projects.

     Your Committee is particularly concerned with the problems
arising when condominium property regimes are developed in areas
zoned for agricultural use, resulting in the bypass of underlying
state and county land use laws and regulations.
 
Fair Market Value Standard for Negotiated Lease-to-Fee Conversion
of Condominiums

     Your Committee finds that appraisal of real property should
be based on its fair market value to ensure equity and fairness
in the process.

     Additionally, your Committee finds that a uniform appraisal
standard for condominiums will avoid bias or impropriety by
appraisers, reduce lengthy litigation to determine land values,
and expedite the negotiation of lease-to-fee conversions.

Boards of Directors of Associations of Apartment Owners Purchase
Agreements with Lessors

     Your Committee finds that condominium lessees are often able
to acquire the leased fee interest appurtenant to their
apartments at more affordable prices when the association of
apartment owners negotiates directly with the project's lessor
for a bulk purchase of all of the lessor's interests by the
association and its members.

     Your Committee further finds that it is necessary to clarify
the powers of the boards of directors of associations of
apartment owners to enter into purchase agreements with lessors

 
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in order to facilitate and encourage voluntary lease-to-fee
conversions of condominium projects in an efficient and
economical manner.

Condominium Representation on the Real Estate Commission and use
of the Condominium Education Fund

     Your Committee finds that the Real Estate Commission has
oversight over the implementation and enforcement of the
Condominium Property Regimes under chapter 514A, Hawaii Revised
Statutes (HRS), including the Condominium Education Fund.

     Your Committee finds that currently there are no condominium
owners or board members on the Real Estate Commission who
exclusively represent the interests of condominium associations.  

     Your Committee finds that it would be prudent and helpful to
have representatives of condominium associations and their board
members to discuss and participate in decision making under the
regulatory authority of the Real Estate Commission regarding
condominium issues, particularly the use of the condominium
education fund and the education of condominium association board
members.

     Additionally, your Committee finds that the Condominium
Management Education Fund is currently being used for personnel
that are not allocating all of their time to carrying out the
responsibilities of the Condominium Management Education Fund.

Collecting Unpaid Maintenance Fees

     Your Committee finds that currently, condominium owners have
no means of collecting delinquent maintenance fees, particularly
once an apartment is sold in foreclosure.  As a result,
delinquent owners are receiving benefits, such as common
utilities, security, building maintenance, and recreational
facilities without paying for them.  Non-delinquent owners in the
association carry the burden of maintaining the condominium
association's budget.  Your Committee, therefore, finds that the
condominium association should be entitled to terminate common
benefits for nonpayment.

     Your Committee finds that once a condominium goes into
foreclosure, condominium associations have difficulty collecting
delinquent maintenance fees which increase due to the fact
lenders purposely delay recording the deed until a sale is
confirmed.  The proposed H.B. No. 1276, H.D. 1, S.D. 1, measure
sets a reasonable time limit for transferring the condominium to

 
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the purchaser in foreclosure in which liability for common
expenses will begin to accrue to the new owner.

     The purchaser or mortgagee of record is required to begin
paying maintenance fees when the sale is confirmed.  Your
Committee finds that occasionally, a delinquent owner is not
paying maintenance fees to the association but the owner is still
collecting rent from a tenant.  The proposed H.B. 1276, H.D. 1,
S.D. 1, will allow the association to demand the rent from the
tenant to pay the maintenance fees.

     Some of the Committee members expressed concern that this
measure appears to interfere with the contract between an owner
and tenant.  However, your Committee finds that when the owner
took title to the condominium, the owner simultaneously agreed to
abide by and be governed by the condominium board's rules and
regulations, including the payment of maintenance fees.  

Six-Month Priority Lien

     Your Committee finds that currently, state law allows
condominium associations a lien for unpaid maintenance fees.
However, since many condominiums are valued at less than their
mortgages, and since mortgages have priority over the
associations' claim, associations usually receive no money from
the proceeds of the sale of foreclosed unit.  The proposed
H.B. 1276, H.D. 1, S.D. 1, provides for a six-month priority lien
that will allow condominium associations to collect delinquent
maintenance fees.

     Your Committee finds that the banking industry is under the
impression that a six-month priority lien will chill the
secondary mortgage market.  However, your Committee finds that
fifteen jurisdictions contain a priority lien in their statutes
and have not experienced a negative impact on the secondary
mortgage markets.  More specifically, in states that have a
priority lien, secondary mortgage brokers such as Fannie Mae and
Freddie Mac will pay the delinquent maintenance fees at the time
the unit is purchased.

     In order to give the Housing and Community Development
Corporation of Hawaii time to negotiate with the bond buyers of
the Hula Mae bond program, the six-month priority lien provision
will not take effect until January 1, 2000.

Condominium Reserves

     Your Committee finds that currently, condominium
associations are required to deposit their funds in a financial

 
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institution in the State.  However, there is an inadequate number
of financial institutions in the State in which condominium
associations may legally deposit their funds.  Due to the
$100,000 federal insurance limit on accounts, many associations
have uninsured moneys deposited in financial institutions in
Hawaii, which may cause a breach of their fiduciary duty to the
condominium owners.

     Your Committee finds that allowing condominium associations
to deposit funds in Hawaii credit unions and invest with a
securities broker in Hawaii will expand investment opportunities
as well as provide protection to the condominium associations'
reserve funds.

     Your Committee encourages both the banking industry and
condominium associations to continue the dialogue regarding the
issues in this measure and to make recommendations to the
Legislature.

     Your Committee has amended this measure, as received, by
replacing its contents with the contents of the proposed H.B.
No. 1276, H.D. 1, S.D. 1, with the following substantive changes:

     (1)  Establishing the common expenses collectible date when
          a mortgage is in foreclosure to:

          (A)        days after the order confirming the sale to
               the purchaser has been filed with the court;

          (B)        days after the hearing at which the court
               grants the motion to confirm the sale to the
               purchaser; or

          (C)  Upon the recording of the deed, whichever occurs
               first;

     (2)  Limiting associations to invest in obligations that
          have stated maturities of no more than one year; and

     (3)  Adding an effective date of August 1, 1999, and placing
          a sunset clause of two years to the CPR county zoning
          section. 

     As affirmed by the record of votes of the members of your
Committee on Government Operations and Housing that is attached
to this report, your Committee is in accord with the intent and
purpose of H.B. No. 1276, H.D. 1, as amended herein, and
recommends that it pass Second Reading in the form attached

 
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hereto as H.B. No. 1276, H.D. 1, S.D. 1, and be referred to the
Committee on Ways and Means.

                                   Respectfully submitted on
                                   behalf of the members of the
                                   Committee on Government
                                   Operations and Housing,



                                   ______________________________
                                   ROD TAM, Chair

 
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