Page images

Of particular interest to the Special Committee on Aging is the authority we have to see that management arrangements for retirement communities are reasonable and financially feasible.

Your proposed bill wisely provides that California may continue to maintain its high level of protection for the home-lot buyer and that its statute will not be superseded by federal legislation. However, if the mail order seller of outof-state subdivisions remains outside the state, there is very little that California can do to protect its citizens. V

The federal courts do not have jurisdiction to entertain an action by a state to enforce state statutes. Even if they did, they would have to be authorized to issue injunctive orders upon which contempt citations against offending promoters can be based. Instead of our federalism being an obstacle to a state protecting its citizens against fraud, loss of funds, and imposition, the genius of our concept of one union out of many states should be that the federal government will act to assist the states where state boundaries prevent state action. We have developed a workable, uniform extradition act for criminals who flee across state borders. For too long, have we stood by, while mail order promoters lurk outside our borders under the protection of archaic jurisdictional concepts and use the mails to sell in violation of state laws. Much today is heard about creative federalism. One concept of creative federalism is that the federal government will act in those areas where the states cannot act for themselves and leave other matters to the states, to govern matters as local conditions dictate. One of the most important provisions to be included in the proposed bill would be a provision that it would be a violation of federal law to use interstate commerce to sell subdivision land to citizens of a state when the laws of that state have not been compiled with. An equally important provision would be one which would enable a state to go into the federal court where the land is located or the promoter has his principal place of business and there be able to obtain an injunction preventing further sales until the promoter has compiled with state law. In this way the federal government would be assisting the states in a proper federal area where assistance is greatly needed while at the same time, the individual states can carry out their individuals concepts of investor protection.



I have in the past supported the need for federal legislation designed to regulate interstate real property subdivision offerings, and I am pleased that your committee is further studying and considering such legislation.

California is a leader in state regulation of "out-of-state” subdivisions, and based upon our experience in this field, I would like to offer for your consideration some observations in connection with S. 2672. The three general areas I would like to discuss are:

(1) Preemption.
(2) The residential limitations.

(3) Enforcement. A review of the California statutes will demonstrate the effect of federal preemption as it would relate to California, and may possibly aid in understanding the concern of other high-consumer states.

The jurisdiction of the Real Estate Commissioner in California since 1923 has extended to all lands divided into five or more parcels for sale or lease, regardless of whether the parcels offered are located in California or outside of California.

Until 1963, the California Subdivision Lands Act remained a "full disclosure" statute. Similar to the bill under consideration, or law was characterized as a "blue sky law," protecting the purchasing public by disclosure of facts pertinent to the subdivision offering.

This was changed in 1963. Affirmative standards were amended into the statute to assure that the subdivider could and would deliver to the purchasing public what he represented he would deliver. An aspect of these affirmative standards is the requirement that the land actually be capable of being síd for the purpose represented and advertised. For instance, if “residential” lots are being offered, the subdivider has to demonstrate that the lots contain ameni

[blocks in formation]

ties normally attributable to residential lots, such as water, sewage, and vehicular access. We require the subdivider to demonstrate that these facilities will be available before he is permitted to offer in California.

These affirmative standards were established in 1963 for both in-state lands (California subdivision lands offered for sale in California) and out-of-state lands (subdivision lands located outside of California).

In 1963, the California Legislature first distinguished between "in-state" and “out-of-state” lands, and conferred on the Real Estate Commissioner "fair, just and equitable” power relating to out-of-state subdivision offerings.

In effect, this legislation required that out-of-state offerings in California must be demonstrably fair in all respects. To be fair, not only must access; off-site and on-site facilities; and the utility of the lot be confirmed, but the price must be fair. There must be a strong correlation between the appraised value of the lots and the price they will be offered for in California.

Between the early sixties and enactment of this statute, California was flooded with out-of-state subdivisions, most sold sight-unseen, and many at prices bearing little relationship to current market value.

From 1960 to this point in 1963, under then limited legal authority, public reports were issued on an average of about 86,000 acres a year of Arizona, Bahama, Hawaii, Idaho, Nevada, Florida, New Mexico, Utah, Colorado, Mexico and Washington subdivision property for sale in California. Since the added outof-state control in effect since September 1963, less than an average of 10,000 Arizona, Oregon, Hawaii, Nevada and New Mexico acres per year have been authorized for sale in California. During this period, numerous additional inquiries were received from Arizona, Arkansas, Florida, Hawaii, Nevada, Oregon, Texas, Utah, Virginia, Washington, Australia, Bahama, Brazil, Ecuador and Puerto Rico.

In addition to the decrease in acreage authorized to be sold, we determined that the prices on some of the proposed subdivisions were excessive and unfair. Price reductions were obtained in several cases. A report on out-of-state subdivisions was prepared by our staff earlier this year, and I understand copies have been made available to your committee. This report gives considerable detail on price reductions and other aspects of the California subdivision controls.

The "fair, just and equitable" concept certainly has been a substantial factor in deterring marginal and sub-marginal out-of-state real estate developers from activity in California.

In 1965, the Legislature set up standards to be met for control over planned developments, condominums, stock cooperatives and community apartment projects, providing that the Commissioner should issue a public report if he finds the organizational setup and documents of the proposed project are "reasonable"; otherwise, he may decline to issue the report.

Without further comment on California's legislation requiring more than "blue sky” intercession for public protection, suffice it to say that should the federal government be deemed to have preempted the field, or even if there are doubts on preemption, California's integrated and effective real estate subdivision regulation will suffer.

My staff has previously submitted the following language which I believe will resolve the question of preemption, and I again submit it to you for consideration : "It is contemplated that state and federal governments shall exercise concurrent jurisdiction in the field of regulation of the sale or lease of out-of-state real estate subdivision offerings, and nothing in this act shall affect the jurisdiction of any state or of the District of Columbia over any subdivision or any person." Some of this language is now found in the amendment to S. 2672 printed 6/9/66.

I also had reservations regarding the scope and application of the proposed legislation. Sec. 2(2) defines subdivision, for the purpose of the Act, as “land, improved or unimproved, which is divided into five or more lots or parcels for residential develonment * * *."

This Art, then, would not apply to commercial or industrial subdivisions, and apparently would also not apply to recreational, agricultural or "own-a-niece-of-America” subdivisions.

Offerinos of recreatinnal, agricultural and purely speculative subdivision lots carry the greatest dangers to the purchasing public. Many of the most marginal offerings are "agricultural and purely speculative land." It has been my observation that most criminal convictions of out-of-state land promoters involved non-residential subdivision lots.

The amendment to S. 2672 printed 6/9/66 appears to resolve this problem, which I consider basic to the effectiveness of the bill.

California is particularly concerned with the enforcement of its subdivision laws, and we view this bill as a vehicle to obtain some control of out-of-state subdividers who violate our subdivision laws and my orders by remaining outside California's territorial jurisdiction.

During 1965, I issued thirty-three Desist and Refrain Orders relating to outof-state developments illegally offered for sale in California. The subdivisions were located in Arizona, Arkansas, Florida, Hawaii, Idaho, Maine, Nevada, Oregon, Tennessee, Utah, Washington, Australia, Bahama, and Brazil,

While theoretically California may have the means to bring these developers to justice if they flaunt the order, as a practical matter, by remaining out of the state, the developers can avoid the imposition of effective sanctions.

We have prepared and previously submitted the following amendment to the author's staff: "If it appears to the Commission at any time that an agency or court of a state has issued an order restraining or enjoining the offer to sell or lease, or the sale or lease of lots or interests in a subdivision project subject to this act, the Commission may, after notice by personal service or the sending of confirmed telegraphic notice and after opportunity for hearing to be commenced within fifteen days after said notice, issue a stop order restraining the developer or his agent from offering to sell or lease, or selling or leasing, lots or parcels in said subdivision in said particular state until there has been compliance with the state restraining order or injunction." We believe the cooperative law enforcement aspects of this proposal warrant further consideration.

I have endeavored to bring to your attention only matters which I believe are substantial. Thank you for your consideration of these proposals.


Were it not that a prior commitment interferes with my wishes to be present at the Subcommittee Hearing on June 21, I would expect the committee might address some of the following questions to me. I have endeavored to frame adequate responses to each.

1. How does California's subdivision law compare with those of other states? Do difficulties arise because of variations in regulatory requirements from state to state?

California's subdivision law is probably the most comprehensive of any in the nation. I believe the staff of the bill's author has gathered information concerning varying statutes and those states which have none whatsoever, Subdividers may have some difficulty in meeting the varied requirements of the different states. However, they follow an enforcement pattern which seldom includes conflict. That is, I know of no instance where one

state has required of a subdivider something which another state forbids, 2. You have supplied the committee with copies of a report on the activities of your jurisdiction regulating out-of-state subdivision offerings in California.

(a) Can you describe some of the land covered by your desist and refrain orders ?

Virtually all of our desist and refrain orders were issued against subdividers who had made no attempt to file with us. Therefore, our only information was that subdivided land by these people was being offered in California. Since few, if any, of these people have subsequently attempted to qualify their land for sale in California we can assume that in most instances the land would not have qualified for sale that is, it would not

have met the fair, just and equitable test. (6) You have received a number of inquiries from people who did not follow through in attempting to qualify their land for sale in California. Do you have any estimate of the acreage involved ?

Most of these inquiries were general in nature, and our response was to provide them with the laws and regulations of California, along with descriptive matter as to how one goes about filing here. This has not provided us with the mechanics for compiling statistics. However, most out-of-state subdivisions involve many hundreds of lots in order to be feasible for the

subdivider to carry the load of a national advertising campaign. (c) What would you say is the significance of the drop in volume of the number of acres included in offerings cleared for sale in California since your 1963 statutes, as compared to permits issued between 1958 and 1963 ?

Previously, a subdivider had to establish only that the offering was not inherently fraudulent. Now, he must meet affirmative standards to prove

that the offering is not unfair to the investor. To meet these higher standards would, in my opinion, have the same impact on earlier out-of-state offerings in California as a federal statute requiring disclosure might have in a field where no statutes had existed previously. (d) Would you say that the price reductions referred to in your report were brought about by the strict provisions of your law? If so, would you say that this an indicator of the magnitude of the mail order land sales industry?

Since most of these reductions were effected during the course of the processing of the subdivision filing, I think there is no doubt but that California's laws have resulted in these savings to California residents and most certainly are an indicator of the tremendous sums of money involved

in interstate land sales. (e) Your report deals with the pitfalls of exchange privileges. Would you care to comment on this element of interestate land sales promotion?

I have not as yet had an exchange privilege proposal advanced which has been acceptable under California's statutes. There are two basic realities involved : If the subdivider wishes to set aside only a small fraction of improved lots which might be exchanged for unimproved lots, then he really never expects the subdivision to become fully developed. On the other hand, if the subdivider really expects the growth to come about which he speaks so glowingly, then he must be prepared to set aside an improved lot for every unimproved lot sold. We have found this to be unacceptable to the out-ofstate subdivider, most of whom are not land developers at all; but are actually interested in selling very small parcels of what is in fact substan

tially undeveloped raw acreage. (f) You have reported a default rate among contract purchasers. Have you been able to develop findings on this information?

Of course, all highly promotional activities have a relatively high default rate. Our spot checks to date have not been conclusive; but, then, our more strict California laws are designed to see that the purchaser gets that which he has bargained for. To date, most of our spot checks have elicited re sponses from defaulting purchasers indicating only a change of heart after

the promotional activity up to the point of sale has been passed. (For a report on out-of-State subdivision activities prepared by the California State Division of Real Estate, see p. 368.)

Senator WILLIAMS. We will recess until 2 p.m., and will have Mr. Hoffman and Mr. Bertoch here together and Mr. Ralph Smathers.

(Whereupon, the subcommittee recessed at 1 o'clock to reconvene at 2 p.m. the same day.)



BETTER BUSINESS BUREAU, INC. Senator WILLIAMS. Mr. J. R. Hoffman, vice president, National Better Business Bureau. He was a witness in 1964. You were talking about self-regulation in 1964. Is that still true?

Mr. HOFFMAN. I do have a few remarks I prepared here. I didn't go into any great detail. I was thinking there must have been many witnesses before me who would fill the committee in on the general background here of land sales, so I just tried to summarize our recent experience since 1964, primarily, and I will read my remarks, and perhaps elaborate on a few of them afterward.

I am J. R. Hoffman, vice president, National Better Business Bureau.

AFTERNOON SESSION For the past 10 years, we have seen a resurgence of the land boom. Most of the subdivisions and developments identified with it have been well planned, well financed, and successful in meeting the needs of our expanding population. The increase in the number of elderly persons seeking their place in the sun has led to the building of many fine retirement communities throughout the country.

However, the land boom has opened the door to an exploitation of the elderly and others seeking their own land, by an unscrupulous minority in the industry. In particular, the sale of land by mail, often many hundreds of miles away, has led in many instances to misrepresentations and exaggerations which have trapped the unwary into signing tight installment contracts, calling for monthly payments for as much as 7 or 8 years before they get the deed to the property.

Many have never seen their dream sites, and don't even know they have bought desert or marshland. Others have hoped pathetically that they could realize a profit from their “investment acreage,” not realizing that development might be so difficult and costly as to be virtually impossible, or, at best, generations away.

A number of attempts have been made to correct these abuses, and a score of States now have laws to govern the sale of out-of-State subdivided property to their citizens.

The Post Office has investigated many questionable operators in the field, has brought indictments of a number of promoters, and gotten convictions.

The light of publicity has altered many to investigate, before they invested, and, in general, the National Better Business Bureau feels that the most prudent way to buy land is to examine it personally to see if it meets one's own requirements, even though such may involve expense and inconvenience. Particularly, there are many offers, now, emanating from the Caribbean area, Central and South America, and elsewhere. The way of life in a region outside this country might or might not be congenial to a family unaccustomed to its unfamiliar ways.

Parenthetically, if I might make a part of the record an article that we worked on with Dun's Review entitled, “ 'Executive' Land Boom in the Caribbean.” If I might make that a part of the record, I would like to turn this exhibit in.

Senator WILLIAMS. Dun's Review?
Mr. HOFFMAN. From Dun's Review, Dun & Bradstreet Review.

Senator WILLIAMS. This is a Dun & Bradstreet publication. Very good; we will include it without objection. (Text on p. 128.)

Mr. HOFFMAN. If personal inspection is impossible, then detailed facts regarding the true nature of the land should be developed, including information on the financial status and responsibility of the developer, his plans for the property, when the project is to be completed,

et cetera. The publication of reports by better business bureaus and State agencies has been a step in such direction. Many States require the filing and approval of all advertising and promotional literature, and have clamped down on gross misstatements. Of course, it is a considerable burden on a national developing firm to qualify a particular land offer with a score of separate States. Executives of several large companies have told us that they hoped for Federal legislation which might encompass the requirements of the several States and so, ease their burden somewhat.

« PreviousContinue »