California Real Estate Legislative Update For 2021-2022

Overview by Dan Harkey

Business & Financial Consultant

Email- [email protected] Web- www.danharkey.com Cell- 949-533-8315

This overview can be found on my website.

Most of California’s newly enacted laws and recent proposed legislation use the “COVID crisis” as a primary reason to construct forgiveness programs for tenant’s rent payments arrearages. This forgiveness transfers the risk to the property owners. The result is the systematic redistribution of wealth from property owner/landlords to their tenants under the disguise of “crisis solutions” and/or “fairness.”

With these new recently passed laws and legislative bills in process California intends to tighten up state government control of all aspects relating to the ownership and operation of residential owner-occupied homes and residential income rental property. This control includes moving zoning and building regulations for local to state control. This increased state leveled control will also include rental applicant approvals, tenant notices, prohibitions on raising rents, evictions, the default procedure for delinquent tenants, rent controls, and collection of rental income from residential income property.

The proposed bills includes a newly invented state level punitive tax on rental income receipts by property owners to pay for the increase government administrative oversight. This is a way for government to get around proposition, 13 enacted in 1978, and raising property tax by calling it an “annual excise tax” on rents received. Recall that Prop 13 capped annual increases of property tax on residential property to 1% for residential and 2% for commercial properties.

The goals are to increase state taxation and create additional administrative controls resulting in punitive consequences for the privilege of real property ownership, which will correspondingly diminish the bundle of rights and benefits expected. New California legislation also creates specially chosen groups who may gain preferential financial advantage in future ownership of real property. Government wants to control all aspects of real property ownership or become property owners outright in cooperation with their specially chosen subsets which they refer to as “eligible parties.” I refer to these as “FOG’s-friends of government.”

In most cases each new bill also creates an additional newly created administrative bureaucracies staffed by public employee labor union members to be paid for from additional taxation, fees, and penalties. New bureaucracies will sprout additional burdensome reporting requirements for property owners including threats and accusations by tenants, inquiries, investigations, lawsuits, prosecutions, and penalties. Nothing more and nothing less!

As this is happening small businesses in California and all over the U.S. are reporting that while they have faced unprecedented economic disruption and subsequent government shutdowns, they are now faced with a new set of problems that prohibit recreating their prior successful business enterprise and robust economic recovery. They face having trouble filling jobs with qualified workers because small businesses cannot compete with compensation from a combination of unemployment benefits offered by both the state and federal governments and state and federal subsidies on rent payment defaults.

For many workers, the prospect of lying in a back yard hammock or being glued horizontally to a couch in front of the television, cell phone or computer screens sounds like an easy choice. Those who profess individual accountability and self-sufficiency be damned. It may now an old-school and outdated thought process to go to work full time and engage in productive efforts.

Government intervention to take from productive people and redistribute the benefits to unproductive people always has in the past and always will in the future have a downside as many of the new California laws will prove-up. But it does assure more government employees, union memberships, and their job security.

AB 3088- Tenancy: rental payment default: mortgage forbearance: state of emergency: COVID-19.

This bill was passed by the California Legislature and signed into law by Governor Gavin Newsom on August 21, 2020.

AB-3088 deals with rent moratoriums for all residential single-family tenant occupied, and 1 to 4 residential income properties, and larger multi-unit residential properties when the tenants are unable to pay rent due the reduction in income resulting from the “novel coronavirus.”

Major provisions include:

• Amends’s landlord tenants’ contract relationships, including the collection and payment of rents and remedies for non-payment. Yes, landlords will get screwed at the expense of egalitarian social engineering and demands for ever-growing the size of the administrative state of public employees. 
• Rent moratorium evictions applies to all residential income property until February 1, 2025. All includes not only 1 to 4 residential rental units, but all sizes of units and composition for residential income properties, including larger complexes.
• Prohibits foreclosing on property owners for defaulted payments applies only to single-family and 1 to 4 residential properties. Does not apply to other than 1 to 4! The means that is does not apply to 5 or more residential, commercial, industrial, or land property owners. 
• This new law allows cheating (systematic loopholes created) by none- paying-tenants and non-paying-debt by property owners that falsely use the COVID crisis excuse. There are many loopholes so that irresponsible parasites can stay in the property for free and not pay rent due to the property owner who in turn may not be able to make timely mortgage payments. The possibility of a property owners to ever recover payments for arrearages from some irresponsible, parasitic, or criminal minded tenants is remote. Their comeuppance will be when these shiftless bums attempt to rent another property in the future and find that the new landlord demands proof of rent paid for the prior tenant occupancy. This comeuppance has been nullified as you will see in AB 15 below.
• California’s new legislation will supersede the order from the Centers for Disease Control and Prevention and will be the dominant law in the state. This is a question, and the answer is not clear. California’s new laws are much more punitive and long lasting.

1.   AB 15- California, COVID-19 relief: tenancy: Tenant Stabilization Act of 2021.

Active bill, in committee process. Has been referred to Revenue and Tax committee and California Department of Housing and Community Development for review.

A few major provisions:

• This bill would extend the definition of “COVID-19 rental debt” as unpaid rent or any other unpaid financial obligation of a tenant that came due between March 1, 2020, and December 31, 2021. The bill would also extend the repeal date of the act to January 1, 2026. The bill would make other conforming changes to align with these extended dates.
• This bill would provide that a tenant is not required to submit that additional supporting documentation unless the landlord provides the tenant with a copy of the proof of income that demonstrates that the tenant qualifies as a high-income tenant.
• This bill would prohibit a housing provider, credit reporting agency, tenant screening company, or other entity that evaluates tenants on behalf of a housing provider from using an alleged COVID-19 rental debt, as defined, as a negative factor for the purpose of evaluating creditworthiness or as the basis for a negative reference to a prospective housing provider.
• This bill would additionally prohibit a landlord from taking certain actions with respect to a tenant’s COVID-19 rental debt, including, among others, charging or attempting to collect late fees, providing different terms or conditions of tenancy, or withholding a service or amenity. This bill extends the prohibition to January 1, 2022.

This bill has 45 pages of technical data to absorb. 

1.   SB 1079-Residential Property 1-4, Modification of Foreclosure Procedure.

This Bill was passed into law and became effective January 1, 2021.

With one stroke of a pen the California Legislature has systematically destroyed the concept of real estate protective equity and contract law, necessary elements for lenders taking the risk to lend on real property. Protective equity has historically been determined as fair market value less liens on the property. If a lender foreclosed due to borrower default the protective equity served as a cushion against possible loss. That protection as been extinguished.

SB1079 modifies the historical  non-judicial foreclosures procedure for 1 to 4 residential unit properties. The intention of the law is to give preferential treatment to a predefined group to purchase property in foreclosure at below-market pricing. Tenant occupants, primary residential occupants, named non-profit groups and entities, and government-related community groups are now given preference over independent 3rd party highest bidders at the foreclosure sale. Parties in the group are called “eligible bidders” and “eligible buyers.” who agree to purchase the foreclosure property at the foreclosure auction sale and thereafter for up to 45 days, can now receive the financial benefit of the upside between the foreclosure highest bid price and the property fair market value? These “eligible bidders’ and “eligible buyers” are now allowed to purchase the foreclosed property for the highest bid 3rd party bid price, which in most cases is a substantial reduction from market value. 

You will find a complete summary of SB-1079 on my websitewww.danharkey.com . 

1.   SB 330-The Housing Crisis Act of 2019

Approved into law 10/09/19.

This new law is intended to reduce the time and complexity of approving housing developments in California. This includes housing developments which may contain residential units, mixed-use with a large residential component, and transitional or supportive housing. The bill effectively removed authority for local government and counties and moves it to the state level.

A few major provisions:

·      Takes away significant authority from cities and counties by reducing their review and approval power that shapes their communities.

·       Freezes the ability of local governments to downzone, adopt new development standards, or change land-use in residential and mixed-use areas if the change results in less-intensive or decrease in density uses. 

·       Allows developers to request approval of housing developments that exceed density and design controls of the underlying zoning, if the existing zoning conflicts with the General Plan or a Specific Plan 

·       Expedites the permitting process for all housing development and limits the list of application materials that cities can review.

·       Retroactively limits a city's or county's ability to adopt zoning that reduces residential density, or to impose design standards that limit the housing units allowed. Any such zoning changes made by a city after January 2018, in residential or mixed-use areas, would be preempted. This could create legal challenges and disrupt existing development agreements. 

·       Pre-empts local zoning if it conflicts with a General Plan or the land-use element of a Specific Plan, allowing proposed housing developments to override local zoning. This could expose cities to housing development proposals that do not comply with adopted zoning standards such as density, size, and design criteria. This could create confusion and expose cities to legal challenges over which standards to apply, bogging down the review process and achieving the opposite of what the bill intends. 

·       Limits public hearings to five, reduces the criteria against which a municipality can review in a development application, and restricts the timeline during which a denial can be issued. To comply with this limitation, some cities could change which public bodies hear development cases, reserving hearings to primary approval bodies such as city councils and planning commissions, and limiting community-based hearings held by entities such as historic preservation boards or neighborhood review committees. This could minimize the voices of the least powerful as community-based hearings designed to build consensus or support are disincentivized.

·       Property owners, as well as potential future residents and “housing organizations” can appeal or bring a lawsuit if a municipality does not follow the state mandated process. Giving legal standing to parties with no established property interest (and who may have competing interests), could expose local governments to lawsuits and appeals by multiple parties, creating further delays rather than streamlining the process.

·       Limits cities' and counties' ability to charge application and impact fees: Local governments may still charge for application review and fees to offset increased road usage, public safety needs or other services — but only annual increases following automatic adjustments based on a cost index. 

·       This new law is designed to apply to “Affected cities and counties.” There are 450 cities and unincorporated parts of counties would be classified as “affected” (list can be found online), and face further restrictions on their review authority over proposed housing developments:

5)    SB 10- Planning and zoning: housing development: density

This bill is active and has been referred to the Has been referred to California Department of Housing and Community Development for review.

This bill would allow cities to adopt an ordinance to zone any parcel of land, including currently single-family zones neighborhoods, for up to 10 units of market rate rental apartments if it is in a transit-rich or jobs-rich area or is an urban infill site. The ordinance will not require environmental analysis. Effectively, what that means is that you may find homes in single family neighborhoods being torn down and replaced with up to 10 high density multi story residential rental units. What otherwise was a peaceful and tranquil neighborhood can now be multiplied by 10 times more people in terms of density. You will have no recourse other than put up with the increased density and modified style of living or to sell out to a developer who will pounce on purchasing your home and tearing it down, to be replaced with up to 10 units. You can imagine the reverse gentrification that will go on. The demographic will change from homeownership and quite neighborhoods to transient tenancy along with the change ofless than peaceful coexistence. The 10 unit next to your quiet house may have 20 to 30 people living in it and they will need a place to park.

AB 1199- Homes for Families and Corporate Monopoly Transparency Excise Tax: qualified property: reporting requirements.

Active Bill, in committee process.  Has been referred to California Department of Housing and Community Development for review.

Rental property owners beware. The California Government wants to set up a mechanism and charge you taxes in the form of an unspecified percentage of the rents that you collect from your tenants. The want you to pay for your privilege. The government calls it privilege, I call it a penalty. And yes, create a new bureaucracy to collect, monitor, and prosecute property owners for suspected violations of state law. Violations are a crime. The likely outcome of private ownership of rental housing will to be to replace property ownership with state controlled or direct state ownership.

This bill is a state level property tax disguised as an excise tax increase. The bill walks like a punitive business tax and talks like a punitive business tax. Also, local governments will not like this because this is a state level tax, not a local tax, and local municipalities will not directly benefit.

The bill will impose an “annual excise tax” (from rents received) upon qualified taxpayers, as defined, for the privilege of renting or leasing out qualified property, as defined, in California an “unspecified rate” based on the gross receipts of the qualified taxpayer that are derived from rental income. The first blush of the bill is that it applies to 10 units or more.

The bill would require the California Department of Tax and Fee Administration to collect the tax pursuant to the Fee Collection Procedures Law and would require all amounts collected, less refunds and administrative costs, to be deposited in the Homes for Families Fund, which the bill would create. Upon appropriation, the bill would require that moneys in the fund be used for specified purposes relating to rental assistance, homelessness, affordable housing, suing the property owner for perceived infraction, and housing counseling services.

AB 946- Home Purchase Assistance Fund: personal income taxation: mortgage interest deduction.

This bill is active and has been referred to California Department of Housing and Community Development for review.

This bill will cancel deductibility on interest on second homes. For taxable years beginning on or after January 1, 2022, this bill will disallow the deduction of acquisition indebtedness, meaning loan interest, with respect to a qualified residence of a taxpayer other than the principal residence.

The Personal Income Tax Law allows various deductions in computing the income that is subject to the taxes imposed by that law, including, in modified conformity with federal income tax laws, a deduction for a limited amount of interest paid on acquisition indebtedness, as defined, with respect to a qualified residence of the taxpayer. Existing law limits the aggregate amount treated as acquisition indebtedness for these purposes to $1,000,000, or $500,000 in the case of a married individual filing a separate return. Existing law specifies for these purposes that a qualified residence includes the taxpayer's principal residence and one other residence selected by the taxpayer, as provided.

This bill would require the Franchise Tax Board, in consultation with the Department of Finance, to estimate the amount of additional revenue resulting from the above-described modifications made with respect to the calculation of taxable income under the Personal Income Tax Law by this bill and to notify the Controller of that amount, as provided. The bill would require the Controller, upon receipt of these notifications, to transfer an amount equal to the amount determined by the Franchise Tax Board from the General Fund to the Home Purchase Assistance Fund, as described above. By increasing the amount of money deposited in a continuously appropriated fund, this bill would make an appropriation.

8)    AB 71- Homelessness funding: Bring California Home Act (2021-2022)

This bill is active and has been referred to California Department of Housing and Community Development for review.

This bill, known as the “Bring California Home Act,” would raise taxes on businesses with annual profits of more than $5 million. The objective is to raise taxes on companies to the tune of $2.4 billion dollars. This is a redistribution of dollars from successful businesses to take care of homelessness, expand emergency shelters, and create more affordable housing and fund services including employment support for unhoused people.

California has 12% of the population in the US but boasts 35% of all U.S. welfare recipients because of the generous pay including direct payments, free housing, free medical, and free services. If California is willing to fund vast benefits to both welfare recipients and homeless the indigent population will only grow larger. And as planned will require more government bureaucrats to pass out all the redistributed profits from productive people. Attempting to be a self-sufficient and productive person in California will become even more difficult 

SB 91- COVID-19 relief: tenancy: federal rental assistance.

The Bill was signed by the Governor and Chaptered by the Secretary of state on 1/29/21.

The State of California, in partnership with federal and local governments, has created an emergency rental assistance program to assist renters who have been unable to pay their rent and utility bills because of the COVID-19Crisis.

This law will use federal funding to pay 80% accumulated back rent, for the time frame of April 2020 to March 31, 2021. If a landlord accepts this federal money, they must then forgive the remaining 20%. Tenants effectively receive a 20% discount on rents. Federal money is also available to help cover unpaid rent from March through June of 2021. Maybe, this is the reason freeways have less traffic that they did 5 years ago.  Between unemployment benefits and forgiveness of rents many tenants will be receiving an increase in pay. Also, 70% of the illegal immigrants who arrive in California will receive similar benefits. 

1. AB 1482- California Tenant Protection Act of 2019

Approved by Governor 10/08/19. Chaptered by Sec of State.

Hiring of residential real property for a term not specified by the parties is deemed to be renewed at the end of each term implied by law unless one of the parties gives written notice to the other to terminate. This is month to month tenancy. Notice to terminate must be given at least 60 days prior to the intended date or at least 30 days prior if the tenant has resided in the dwelling for less than one year.

·       Prohibits with certain exceptions an owner of residential real property from terminating a tenancy without “just-cause” which must be stated in the written notice to terminate when the tenant has lawfully occupied the property for 12 months. 

·       When the termination is a no fault just cause, as specified the owner is to either assist tenants to relocate regardless of the tenant’s income while providing a direct payment of one-month’s rent to the tenant or in lieu waive in writing the payment of rent for the final month of the tenancy.

·       Provides that if the owner does not include relocation assistance, the notice of termination is void.

·       Requires an owner of residential property to provide prescribed notices to the tenant of the tenant’s rights under these provisions 

·       The foregoing provisions do not apply to properties subject to a local ordinance which imposes just cause for termination adopted on or before September 1, 2019, or to property subject to a local ordinance requiring just cause for termination adopted or amended after September 1, 2019, when the provisions of such ordinance are more protective of the tenant than this law.

·       Unless extended or renewed, the above provisions are repealed as of January 1, 2030.

·       Tenants are to receive notice prior to an increase in rent.

Thank you for reviewing the above overview. You may share with friends. Also, you may go to www.danharkey.com and forward this report from there.

Dan Harkey