2011 Legislative Highlights
California Real Property Journal
The first half of the 2011 legislative session was dominated by the debate over how to address another massive state budget deficit. This debate has become a kind of annual ritual for the California Legislature. However, this year for the first time in many years, the budget was completed and adopted before the start of the new fiscal year on July 1, 2011. This legislative accomplishment attests to the motivational effects of Proposition 25, the law passed last year by the voters that provided for the forfeiture of legislator’s pay for late budgets until a final budget is in place and reduced the budget vote threshold from two-thirds to a majority of each house of the Legislature.
The new budget for the 2011-2012 fiscal year is a patchwork of spending cuts, fee hikes and optimistic revenue assumptions. Among the budget trailer bills that made budget related revenue and tax law changes were two companion bills intended to help implement the new state budget by reallocating a portion of the estimated $5 billion in property tax revenues that would otherwise go to California redevelopment agencies back to schools and local governments to stabilize school funding and to pay for fire and police services. This reallocation program, was legally challenged by the California Redevelopment Association, League of California Cities and several individual cities. On December 29, 2011, the California Supreme Court issued a ruling on the challenge that will profoundly affect how development is conducted and financed in urban core areas throughout California.
Of course, the budget was not the only item on the Legislature’s agenda, and in 2011 the Legislature otherwise continued in a business as usual mode considering 2,719 bills and sending 870 of them to Governor Brown for signature, the fewest of any session since 1966. Governor Brown late in the session, nevertheless still expressed annoyance at the volume of insignificant new bills and suggested that the Legislature would be playing the “veto blues,” before he was finished. In the end, however, he only vetoed 125 of the bills submitted to him. A modest fourteen percent, which was a significantly lower rate than his predecessor.
One group of the bills signed into law make up a modest economic stimulus program that includes a limited streamlining of the State’s environmental review process for the benefit of certain favored types of projects that was hailed by the Governor as important for creating new jobs in California. Another group of bills signed into law focus on strengthening the regulation of real estate brokers and appraisers with an emphasis this year on bringing California in to line with federal standards. These groups of bills as well as a select number of other bills enacted into law in 2011 are reviewed in this article which is intended to focus on the most significant or interesting new legislation for real property law practitioners, rather than provide a complete synopsis of all real estate related legislation as has been done in the past.
This article provides only summary references to the text of the bills selected for comment. Copies of the actual chaptered versions should always be reviewed for details and are available from the Legislative Counsel at http://www.leginfo.ca.gov under “Session 2010-2011.” Unless otherwise noted, all bills covered in this review are operative January 1, 2012.
The two companion budget trailer bills, signed by Governor Brown on June 28, 2011, proposed a complex system for the reallocation of a significant portion of the property taxes received by redevelopment agencies beginning in 2012. Taken together the two bills presented redevelopment agencies throughout California with a Hobson’s choice: they could either agree to make sizable remittance payments that would be distributed to schools, fire and transit districts or choose to be eliminated and their responsibilities and assets transferred to “successor agencies,” to be used, “to fund core governmental services including police and fire protection services and schools.”
ABX1 26 (Blumenfield) Redevelopment Agency Dissolution.
The first of the bills, ABX1 26, the “dissolution bill,” as of its effective date (June 29, 2011) suspended various RDA activities and prohibited RDAs from incurring new or expanding existing monetary or legal obligations. As of that date RDAs could not, among other things, issue or sell new bonds, incur new debts, enter into new agreements or amend or modify existing agreements, obligations or commitments, adopt or amend redevelopment plans, make loans, dispose of or acquire real property, exercise the power of eminent domain, or prepare or have prepared environmental impact reports. The new law allowed RDAs to continue to fulfill “enforceable obligations” (defined in the act), but only until a set date (originally October 1, 2011) at which time all those RDAs not participating in the Alternative Voluntary Redevelopment Program established under the second budget trailer bill (ABX1 27) would be dissolved and their assets, properties, contracts, books and records transferred to the control of successor agencies, generally the county, city or city and county that authorized their creation. ABX1 26 directs successor agencies to continue to make payments and perform obligations required pursuant to the enforceable obligations of their respective former redevelopment agencies, but otherwise to “expeditiously” wind down the former redevelopment agencies’ affairs and remit all unencumbered balances of redevelopment agency funds to the county auditor-controller and dispose of all former redevelopment agency assets and properties no longer needed for approved development.
ABX1 26 also provides for the establishment of an oversight board for each successor agency that will be composed of members representing specified local governmental entities as well as an appointed member of the public and a representative for the former redevelopment agency’s employees. The oversight boards have approval rights over the specified actions of the successor agencies and are subject themselves to review by the Department of Finance. In addition, ABX1 26 requires county auditor-controllers to establish and administer a Redevelopment Property Tax Fund in the applicable county to be funded by the amount of property taxes that would have otherwise been allocated to the applicable dissolved RDA. These funds will be used to pay the continuing monetary obligations incurred by the dissolved RDAs as enforceable obligations. Any excess funds will be distributed to county local governments, schools, and special districts in the proportional shares of what they would have received absent redevelopment. The new law also gives the controller authority to recover certain assets that were transferred by an RDA after January 1, 2011 to local governmental and other authorities in anticipation of the passage of these bills.
ABX1 27 (Blumenfield) Redevelopment Agency Continuation.
The companion trailer bill ABX1 27, the “continuation bill,” provided a mechanism by which RDAs could remain in operation after October 1, 2011, if before that date the city or county that created them adopted a nonbinding resolution of intent to participate in the “Alternative Voluntary Redevelopment Program” and by November 1, 2011 enacted an ordinance to comply with the program. The Alternative Voluntary Redevelopment Program, was structured as “voluntary” in order not to violate Proposition 22, the constitutional amendment passed by the voters in November 2010 which prohibits the State Legislature from diverting revenues dedicated to local governments to the State. The program requires a participating city or county to make annual Department of Finance calculated remittances beginning in fiscal year 2011-2012 and continuing each year thereafter for deposit into a Special District Allocation Fund for specified allocation to certain special districts and into the applicable county Educational Revenue Augmentation Fund for distribution to school entities and special districts that serve the participating RDA’s project area. This act further authorized the city or county to enter into an agreement with the RDA in its jurisdiction to transfer a portion of the RDA’s tax increments to the city or county that equals the amount of remittances required under the program. The target total remittance amount for the 2011-2012 fiscal year was $1.7 billion and for each year thereafter was $400 million. Each community’s share of that total amount would be proportional to its RDA’s share of total property revenues apportioned to all RDAs in the State.
Taken together the two bills effectively eliminated RDAs, unless they and their associated city or county “voluntarily” agreed to transfer to their respective county auditor-controller specified portions of their tax increment revenues for non-redevelopment uses.
It was anticipated by the drafters that most local governments and their resident RDAs would elect to participate in the voluntary payment program, and the two bills were cross-linked in passage such that ABX1 26 would only affect those RDAs that elected not to participate in the ABX1 27 program. However, instead of accepting the revenue sharing compromise embodied in the tandem legislation, the California Redevelopment Association (CRA) along with the California League of Cities (CLC) and two individual cities on July 18, 2011 filed a petition for writ of mandate with the California Supreme Court challenging the constitutionality of the new legislation and requesting a stay to prevent the new legislation from going into effect until the Supreme Court could rule on the merits of the challenge. The CRA/CLC’s central argument was that the new laws were essentially designed to redirect RDA funds to the State and other taxing agencies and that this redirection violated the intent of Proposition 22 which, CRA/CLC argued, applied to RDA funds. The State in its response filed July 27, 2011, contended that the RDA program was not constitutionally required, that Proposition 22 did not require the preservation of the RDA program which was created by the Legislature and could be terminated by the Legislature, and that the Legislature had the power to create a voluntary redevelopment program and to set the terms and conditions for participation. On August 11, 2011, the California Supreme Court issued a partial stay of the two statutes that blocked the operation of the entirety of ABX1 27 and the dissolution provisions of ABX1 26, but did not stay those provisions of ABX1 26 which prohibit RDAs from taking on new obligations, incurring new indebtedness, transferring assets, acquiring or disposing of real property, entering into new or modifying existing contracts or adopting or amending redevelopment plans (now codified at Health and Safety Code Sections 34161 to 34167). The Court’s order allowed RDAs to remain in existence but with only limited powers to perform obligations and exercise rights related to existing enforceable obligations. On August 17, 2011, the Court modified its order to require each RDA to assess its financial condition and adopt a schedule for making payments on enforceable obligations by August 29, 2011 and to prepare and submit a Preliminary Recognized Obligation Payment Schedule by September 30, 2011. The Court further indicated that it would rule in the case by January 15, 2012. On October 4, 2011, Governor Brown vetoed SBX1 8, which had been passed by the Legislature to add flexibility for RDAs, cities and counties to make the voluntary annual payments and other adjustments. Brown’s veto message stated that this cleanup legislation was premature and should wait for the Supreme Court to rule.
On December 29, 2011, well ahead of schedule, the California Supreme Court ruled unanimously that ABX1 26, the dissolution measure, is a valid exercise of the legislative power vested in the Legislature by the California Constitution; and in a 6 to 1 vote, that ABX1 27, the continuation measure, is invalid because it violates the prohibitions enacted under Proposition 22. The effect of this ruling is to confirm the elimination of more than 400 redevelopment agencies in California without any compromise. Ironically, this was the original proposal made by Governor Brown before the Legislature took up the issue. As part of the ruling, the Court also addressed the future implementation of ABX1 26 and reformed the statute to provide for its delayed implementation by moving back the effective dates for obligations arising before May 1, 2012 by four months, to account for the effect of the Court’s four month stay. For example, the operative date of the dissolution provisions is now moved from October 1, 2011 to February 1, 2012.
This ruling was the worst case scenario for the redevelopment agencies, and we can expect that their advocates will now hurriedly return to the Legislature to seek to salvage some form of a compromise redevelopment program in 2012.
The stressful effects of the continued economic downturn in California were not restricted to the budget arena. They also influenced the character of the land use legislation enacted this year which had a distinct shift to favor jobs over the environment. In particular, this year the Legislature focused on enacting new legislation to address the perception that the environmental review process for new projects under the California Environmental Quality Act (CEQA) was slowing down the recovery. This new legislation focused primarily on modest streamlining of the environmental review process for job-creating projects particularly if they involved one or more of the Legislature’s other favored causes such as renewable energy or infill.
SB 226 (Simitan) CEQA Review Streamlining.
SB 226 is one of the three pieces of legislation signed by the Governor designed to stimulate job growth by streamlining the CEQA review process or expanding the exemptions for infill and solar energy projects to promote and expedite their construction.
Prior existing law contained both statutory and categorical exemptions from the CEQA review process designed to promote infill projects. However, their effectiveness has been highly criticized. In order to further encourage infill and overcome the inadequacies of existing law, SB 226 both expands the statutory definition of “infill projects” and creates new rules narrowing the scope of CEQA review for these types of projects. In particular, SB 226 defines “infill projects” to include not only residential but also retail and/or commercial uses, a transit station, a school or a public office building that is located in an urban area on a previously developed site or on an undeveloped site, if it is mostly surrounded by developed uses.
With respect to infill projects that meet the requirements of SB 226, the new law amends the Public Resources Code to provide that if an Environmental Impact Report (EIR) was previously certified for a planning level decision of a city or county, a future infill project can be streamlined to consider only the effects on the environment that are specific to the project, or to the project site, and which were not addressed as significant effects in the prior EIR (or which would be more significant that previously identified). An EIR prepared for the infill project analyzing those effects would be limited as follows: (1) alternative locations, densities, and building intensities to the project need not be considered; and (2) growth inducing impacts of the project need not be considered.
To qualify for the limited CEQA review provided under SB 226, an infill project must be either consistent with land use planning strategies that achieve greenhouse gas emission reduction targets as determined by the California Air Resources Board, feature a small walkable community, or, where a sustainable communities or alternative planning strategy has not been adopted for the area, include a residential density of at least 20 units per acre or a floor area ratio of at least 0.75. It must also satisfy the applicable statewide performance standards contained in the guidelines for infill to be developed by the Office of Planning and Resources and transmitted on or before July1, 2012 to the Natural Resources Agency for certification and adoption by January 1, 2013. We will, therefore, have to wait to see if these new guidelines when combined with the new review limitations will have the intended effect of stimulating these types of projects. Unfortunately, we will have to wait a couple of years to find out.
SB 226 amends Section 21080.35(a) of the Public Resources Code to create a new categorical exemption for the installation of a solar energy system (defined) on the roof of an existing building or at an existing parking lot subject to specified limiting circumstances, e.g., it must not impact certain protected plants and trees.
SB 226 also makes other additional modifications to the Public Resources Code intended to expedite favored projects. In particular, it amends Section 21084 of the Public Resources Code regarding CEQA’s provisions on “categorical exemptions” to provide that a project’s greenhouse gas emissions shall not, in and of themselves, cause a categorical exemption to be inapplicable to a project, provided that the project complies with all applicable regulations and requirements adopted to implement statewide, regional or local plans that are consistent with the existing Section 15183.5 of the CEQA Guidelines pertaining to the assessment of greenhouse gases.
Finally, SB 226 enacts a minor procedural efficiency to speed up the CEQA review process that allows a city or county adopting or amending its general plan to concurrently refer the action to neighboring cities and at the same time conduct the scoping meeting. The neighboring cities and counties may submit any comments on the proposed action at the same scoping meeting.
AB 900 (Buchanan) Environmental Leadership Development Projects.
AB 900 is the second major piece of legislation enacted this year with the intent of stimulating new construction projects by streamlining the CEQA review process. Specifically, AB 900 enacts the “Jobs and Economic Improvement Through Environmental Leadership Act of 2011,” which provides for the expedited judicial review of any CEQA challenges to a project that has been certified by the governor as an “environmental leadership development project.” To qualify, the project must be large ($200 million investment upon completion of construction) and fall into one of three categories (1) LEED silver or better infill projects (residential, retail, commercial, sports, cultural, entertainment or recreational use) that reduces vehicle trips by 10 percent as compared to similar existing projects; (2) clean, renewable energy projects that generate electricity exclusively wind or solar, but not including waste incineration or conversion; or (3) clean energy manufacturing projects that manufacture products, equipment or components used for renewable energy generation, energy efficiency, or for the production of clean alternative fuel vehicles. To qualify the project must also satisfy the following conditions: create high-wage, high-skill jobs; not result in any net new green house gas emissions; and incorporate binding and enforceable measures to mitigate adverse environmental impacts. Essentially, these are the Legislature’s dream projects. It is not clear how many of theses dream projects actually exist. Likely a small number, particularly as the new law does not apply to any project that already has an environmental impact report in circulation.
The new law expedites judicial review by requiring any CEQA lawsuit challenging public agency’s approval of any environmental leadership development project to be filed directly in the applicable court of appeal thereby skipping local superior court. The court of appeal, in addition, is required to issue its decision in the case within 175 days of the filing of the petition, unless the court finds good cause for an extension. Unfortunately, “good cause” is not defined and there is no mechanism to enforce the 175 day deadline. Consequently, there may be significant difficulties implementing the expedited litigation process.
This new law applies only to projects whose EIR are certified by June 14, 2014 and it actually is only a temporary adjustment to the CEQA process and is scheduled to expire January 1, 2015. Many uncertainties remain as to how the governor will implement the process, whether there will be many projects that qualify for certification and whether the short life span will undermine its usefulness. The law directs the California Judicial Council to prepare rules for handling these cases on an expedited basis by July1, 2012, which should provide more guidance on whether the expedited process will be achievable in a significant number of cases.
SB 292 (Padilla) LA Sports Stadium
SB 292 is the narrowest of the three new laws, but it was actually the model for the streamlined CEQA review process enacted on a broader basis under AB 900 discussed above. SB 292 was specifically designed to facilitate the construction of a proposed 72,000 seat sports stadium complex in downtown Los Angelis and streamlines the EIR preparation process and provides for expedited judicial review (similar to that enacted under AB 900) for that project. It also established criteria for a green stadium and related carbon neutral facilities and establishes a time table for the implementation after construction of certain specified traffic and air quality mitigation measures. It is not clear what will be the consequence if these criteria are not achieved after the stadium is constructed.
In addition to AB 900 and SB 226, renewable energy projects got additional help from the Legislature which enacted several other new laws intended to accelerate or streamline regulatory procedures for environmental review and permitting or otherwise facilitate renewable energy projects that the Legislature has previously sought to encourage under the California Solar Initiative in 2006 and the Renewables Portfolio Standard Program which began in 2002. These new laws include ABX1 13 (Perez) that benefits certain wind energy projects, SB 16 (Rubio) that facilitates solar thermal power plants and photovoltaic power plants, SB 267 (Rubio) that is expected to help reduce the time and cost associated with permitting new photovoltaic or wind energy projects with specified low water requirements, and SB 489 (Wolk) that assists small-scale bio energy projects and SB 618.
SB 618 (Wolk) Solar Use Easements, Williamson Act Contracts and Fully Protected Species
SB 618 is another new law that falls within this category of facilitating renewable energy projects and is of particular interest because it creates a new category of property interest, the “solar-use easement” that may potentially benefit the owners of qualifying parcels of agricultural land throughout California. Specifically, SB 618 seeks to encourage the development of solar photovoltaic facilities on marginally productive or physically impaired farmland that is subject to a Williamson Act contract by providing an alternative method for terminating such contracts that is simpler and less costly than the existing method. SB 618 authorizes the landowner and the participating local governmental entity, after obtaining approval of the Department of Conservation as to the eligibility of the property, to mutually agree to rescind the contract in order to simultaneously enter into a solar-use easement that requires that the land be used for solar photovoltaic facilities for a term of no less than 20 years, except as specified. The rescission fee that the landowner is required to pay in connection with this change of status (6 1/4% of the fair market value of the property at the time of rescission) is one-half the normal cancellation for that would otherwise be paid by the property owner to cancel the Williamson Act contract. The solar use easement, which is held by the local governmental entity, is required to include specified restrictions on the future use of the property as well as restoration obligations that county assessors are required to consider when valuing the real property for property tax purposes. This directive on valuation will to some extent preserve some of the property tax protective aspects of the prior Williamson Act status of the property. Given the recent troubles with the state funding for the Williamson Act programs, many landowners and local governments may find this an attractive alternative.
SB 618 also seeks to facilitate the development of solar energy projects by providing limited relief from the strict statutory prohibitions under the California Fish and Game Code on takings of “fully protected species” that have posed a barrier to projects throughout the state. Specifically SB 618 amends the California Fish and Game Code to provide a mechanism for incidental takings of fully protected species where a natural community conservation plan has been approved and implemented to protect those species. However, given the current limited existence of effective natural community conservation plans throughout the state, it is anticipated that these revisions will have only a narrow immediate effect.
Another major area of continuing concern for the Legislature in 2011 was the further regulation of mortgage brokers, lenders and the foreclosure process. The flow of new bills on these topics has increased dramatically over the last few years and will likely continue unabated as long as the housing crisis remains acute in California.
SB 458 (Corbett) Residential Short Sales.
One of the high profile bills enacted by the Legislature last year (2010) was SB 931 which was intended to facilitate residential short sales by addressing the uncertainty borrowers faced regarding their potential liability for any unpaid balance remaining on the loan after the completion of a short sale. SB 931 added Section 580e to the Code of Civil Procedure which prohibits deficiency judgments under a note secured by a first deed of trust or first mortgage on a dwelling of not more that 4 units in any case in which the dwelling is sold with the written consent of the holder of the first deed of trust or first mortgage for less than the amount owing on the loan. In the event of such a lender approved short sale, the approving the lender is obligated to accept the sale proceeds as full payment thereby eliminating any claim for a deficiency. However, as is not uncommon with new legislation, SB 931 had significant short comings as well as unintended potential consequences which have been subsequently addressed this year in a series of tradeoffs between lender and borrower groups incorporated into SB 458.
The major short coming of SB 931 from the borrower’s perspective was that it only applied to first deeds of trust and mortgages and did not cover junior lien holders. SB 458 rewrites Section 580e to extend the protections enacted under SB 931 to all consenting mortgages not just firsts. This is intended to benefit borrowers, but may instead discourage cooperation from junior lien holders who may prefer to preserve their right to pursue the borrower for a personal judgment after their lien is terminated by a foreclosure of the senior lien. Nevertheless, the new law opens up the possibility for a borrower to negotiate a full release with all lien holders not just the first.
The unintended consequences of SB 931 arose from the fact that it was not clearly limited to consumer transactions or to situations where the dwelling was the residence of the borrower. This raised concerns for lenders on commercial loans involving residential properties which often include additional mixed collateral and guarantors because SB 931 required the affected lender to accept the sale proceeds as full payment and to fully discharge the debt. This requirement potentially cut off the lenders rights to collect against these traditional additional collateral sources for commercial loans. SB 458 seeks to address these lender concerns by adding limitations to the scope of the short sale release that clearly exclude many commercial transactions. In particular, SB 458 provides that the prohibition on deficiencies does not apply if the trustor or mortgagor is a corporation, limited liability company, limited partnership or political subdivision of the state (SB 931 only excluded corporations and political subdivisions). SB 458 also deletes the provision of SB 931 that required the subject lender to “fully discharge the remaining indebtedness” and instead provides in situations where there is mixed collateral that the rights, obligations and remedies of the parties and the additional collateral will be treated as if the dwelling had been sold through a non-judicial foreclosure sale at the short sale price in the manner contemplated under Section 580d which preserves the lenders rights under Commercial Code Section 9604 for mixed collateral and under Civil Code Section 2856 for guarantors.
The final tradeoff between the lender and borrower groups included in SB 458 involves the addition to 580e of a prohibition on lenders from requiring borrowers to pay any additional compensation to obtain their written consent to a short sale, and a provision that makes any purported waiver of the borrower protections of 580e void and against public policy.
SB 4 (Calderon) Non-Judicial Foreclosure Notices.
The high frequency of non-judicial foreclosures of residential properties has highlighted the confusion and lack of understanding of two key groups of participants in such actions, the potential bidders and the affected home owners. SB 4 is designed to help alleviate some of the most common sources of confusion experienced by these two groups regarding the process by adding two informative paragraphs to the Notice of Trustee Sale that must be filed with the county recorder, posted in a public place and published in a newspaper, before the home may be sold. In particular, beginning April 1, 2012, SB 4 requires that the notice of sale, given pursuant to a deed of trust or mortgage secured by real property containing from one to 4 single-family residences, contain specified language notifying potential bidders of specified risks involved in bidding on property at a trustee’s sale, and a notice to the property owner informing the owner about how to obtain information regarding any postponement of the sale. SB 4 also requires a good faith effort to be made to provide current information regarding sale dates and postponements and that the information be available free of charge by any means that provides continuous access, as specified.
AB 793 (Eng) Reverse Mortgages.
This act follows up on AB 329 which enacted the Reverse Mortgage Elder Protection Act of 2009 that, among other things, prohibited reverse mortgage lender or mortgage brokers from participating with, employing, or making referrals to, an individual involved in the sale of financial or insurance products. Despite these cross-marketing prohibitions, insurance agents could still under that law legally direct senior clients to get reverse mortgages in order to fund insurance products. According to the author of AB 793, this loophole allows seniors to be targeted with aggressive and abusive cross promotions for other financial products such as long term care insurance or annuities. AB 793 is intended to remove the motivation for such practices by prohibiting an insurance broker or agent from participating in, being associated with, or employing any party that participates in or is associated with, the origination of a reverse mortgage unless procedural safeguards are maintained that ensure the agent or broker has no direct financial incentive to refer the policyholder to a reverse mortgage lender, and prohibits them from receiving any compensation in commission or direct incentive for providing non-casualty insurance products to reverse mortgage borrowers. The intent here is to cut off the incentive for overselling of insurance products, and this new law does not prevent the agent or broker from providing title and casualty insurance coverages customarily provided under a reverse mortgage.
Brokers and Appraisers
SB 6 (Calderon) Appraisals and Broker’s Opinions of Value.
In recent years, the Legislature has identified faulty real estate appraisals as a key contributing factor to the California real estate mortgage crisis and enacted two bills intended to reestablish the integrity of the real property appraisal process. The first of these bills was SB 223 (Machado), enacted in 2007, that prohibits any person with an interest in a real estate transaction from inappropriately influencing, or attempting to inappropriately influence, the development, reporting, result, or review of a real estate appraisal sought in connection with a mortgage loan. In 2009 the Legislature enacted SB 237 (Calderon) to close a perceived gap in California’s appraisal regulatory scheme with respect to appraisal management companies. During these same years, federal agencies were also promulgating regulations with a similar intent but generally California’s laws were more comprehensive, and more protective of consumers, than the federal rules. However, since the enactment of the Dodd-Frank Act in July 2010, California’s rules have fallen behind some of those recently promulgated by federal regulators and portions of state law became inconsistent with federal regulations. SB 6 updates California’s laws regarding real estate appraisals to reflect changes made by Dodd-Frank and changes contained in regulations released by the Federal Reserve Board (FRB) on October 18, 2010, pursuant to Dodd-Frank. The provisions of Dodd-Frank relating to appraisals became effective on July 21, 2010. The FRB changes became mandatory as of April 1, 2011.
Specifically, the updating under SB 6 includes the amendment of Business and Professions Code Section 10176 and the addition of Section 10177.3 which revise the prohibitions on a real estate licensee who offers or provides an opinion of value of residential real property that is used as the basis for an origination of a mortgage loan. No such licensee may now have a prohibited interest in that property, as specified, or knowingly or intentionally misrepresent the value of that property, within the meaning of federal regulations implementing Dodd-Frank and the accompanying commentary.
SB 6 also amends Section 11345.4 of the Business and Professions Code and adds Section 11345.7 of the Business and Professions Code that govern appraisers and appraisal companies. This acts revises, recharacterizes and extends the existing prohibitions on appraisers and appraisal companies and specifically prohibits certain additional acts such as (i) seeking to influence an appraiser to report a minimum or maximum value for a specified property, (ii) implying to an appraiser that his or her retention depends on a certain estimate of value, (iii) excluding an appraiser from future engagement because of a reported value that does not meet or exceed a certain threshold, or (iv) conditioning an appraiser’s compensation on the consummation of the real estate transaction. This act also prohibits a person or entity preparing an appraisal or performing appraisal management functions from having a prohibited interest in the subject property or transaction.
Finally this act reworks the provisions of Civil Code Section 1090.5 that prohibit a person with an interest in a real estate transaction from improperly influencing or attempting to improperly influence the a real estate appraisal sought in connection with a mortgage loan, and makes it applicable to a “valuation” which is broadly defined to include any estimate of the value of real property in written or electronic form, other than one produced solely by an automated valuation model or system. This broader definition makes these prohibitions applicable to both appraisals and broker price opinions. These revisions to Section 1090.5 also list several acts that represent improper influence pursuant to this section as well as several acts which are allowable.
SB 53 (Calderon) DRE Enforcement Tools.
The increased regulation of real estate brokers and particularly mortgage brokers has been a major goal of new legislation in each year since the beginning of the mortgage foreclosure crisis in 2007. This year was no exception. However, in 2011 the Legislature took a different approach with two regulatory bills, SB 53 and SB 706, that focused on strengthening the DRE’s practical ability to enforce existing regulations rather than adding new areas of regulation. SB 53 was the more prominent bill with this focus enacted into law in 2011. It includes a variety of provisions intended to give the Department of Real Estate (DRE) more enforcement tools with which to crack down against mortgage fraud and other real estate violations and to add safeguards to protect consumers who seek out services from real estate licensees.
The most controversial of these new provisions is the addition of Section 10080.9 to the Business and Professions Code which authorizes the DRE to deal with minor violations of the real estate licensing laws through a “cite and fine” procedure. Under this new section the DRE may issue citations and assess an administrative fine of up to $2500 per violation. As a concession to the California Association of Realtors, the new law provides that although the citation and fine constitute discipline for a violation of law, they shall not be reported as a disciplinary action taken by the Real Estate Commissioner. SB 53 also amends Section 10079 of the Business and Professions Code to provide that in cases where a real estate licensee refuses to obey a subpoena, the Real Estate Commissioner may, by a noticed motion, apply to the Superior Court, without the need to involve the Attorney General, and the Court may issue an order requiring the licensee to appear before the Real Estate Commissioner to produce documentary evidence, or to give evidence regarding an investigation. As an added incentive, SB 53 further provides that failure of the licensee to obey the order of the Court may be punished by the Court as contempt.
At the urgings of the Escrow Institute of California (EIC) which has for years expressed concerns regarding the exemption of real estate licensees from the stringent laws applicable to escrow agents, this act effective July 1, 2012 adds Section 10141.6 to the Business and Professions Code that requires a real estate broker who engages in escrow activities for five or more transactions within a year, as specified or whose escrow activities exceed $1,000,000 within a year, to file a specified report regarding these transactions with the DRE within 60 days following the completion of the calendar year. It also authorizes the Real Estate Commissioner to assess specified penalties for failure to submit the report, and for suspension of revocation of the realtor’s license for failure to pay such penalties. The EIC considers this act an important first step that allows the DRE to identify who among their real estate licensees are conducting escrows and determine if any additional regulatory measures are appropriate.
SB 53 also reworks and expands the obligations of real estate brokers with respect to securities transactions involving the sale of notes secured by real property for which an exemption is claimed under Section 10238 of the Business and Professions Code from securities qualifications. In particular SB 53 adds Section 10236.7 and amends Sections 10237 and 10238 to the Business and Professions Code that requires real estate brokers provide as an additional disclosure to investors in such transactions a copy of information regarding the securities qualification, or exemption from securities qualification under which the transaction is being conducted within 10 days of receipt of funds from the investor.
Finally, SB 53 makes additional clarifying and technical changes to the enforcement provisions in Business and Professions Code Sections 10079, 10156.2, 10176 and 10177 regarding the authority of the Real Estate Commissioner pertaining to discipline and licensure renewal.
SB 706 (Price) DRE and OREA Enforcement Enhancement.
SB 706 is the second piece of enforcement enhancement legislation enacted in 2011. It derives from an oversight investigation conducted by the Senate Committee on Business Professions and Economic Development early in 2011 which followed in the wake of the publishing of the final report of the Federal Financial Crisis Inquiry Commission on the causes of the financial crisis and on the criticisms leveled by the California press against the Department of Real Estate for its lack of taking action against licensed real estate brokers and salespersons. The Senate Committee report identified a series of statutory changes it recommended to enhance the enforcement powers of not only the Department of Real Estate but also the office of Real Estate Appraisers (OREA). SB 706 implements the legislative changes recommended by the Committee which, among other things, extend to the DRE and OREA an array of enforcement tools that are available to other licensing agencies under the committee’s jurisdiction.
Among other things, these enforcement enhancements authorize the DRE and OREA (i) to enter into a stipulated settlement agreement with a licensee or applicant prior to the issuance of an accusation or statement of issues against the licensee, (ii) to recover from a licensee in a disciplinary proceeding, the costs for investigation and prosecution of the disciplinary proceedings upon the order of an administrative law judge, (iii) to recover from a licensee subject to a restricted license, or restricted mortgage loan originator license, the costs associated with monitoring the licensed activities of such licensee, (iv) to suspend a license, endorsement or certificate if the licensee or registrant is incarcerated after conviction of a felony with the right for a hearing unless the conviction was for a violation of federal law or state law for the use of dangerous drugs or controlled substances or specified sex offenses, and (v) to require a licensee or registrant to report to the DRE or OREA when there is an indictment or information charging a felony against them or when they have been convicted of a felony or misdemeanor. One does wonder why the DRE and OREA previously lacked these basic regulatory enforcement powers.
In response to complaints regarding the lack of current information on the DRE website relevant for consumer protection in dealing with real estate brokers, SB 706 also requires the DRE and OREA to make specified disclosures and postings on the internet regarding the status of their licensees and registrants including, among other things, information on supervisions and revocations issued and accusation filed pursuant to the Administrative Procedures Act.
SB 510 (Correa) Branch Managers.
SB 510 also addresses the regulation of real estate brokers and in particular, the responsibilities of real estate branch managers. The central purpose of SB 510 is to address the absence under prior law of disciplinary consequences for a subordinate licensee branch manager who fails to properly supervise salespersons that report to him or her. Under prior law only the employing broker that is at the head of the company was accountable for such failure to supervise and the branch manager’s own license was not at risk. SB 510 amends Sections 10164 and 10165 of the Business and Professions Code to authorize the Real Estate Commissioner to temporarily suspend or permanently revoke the license of a branch manager for failure to properly supervise licensed activity that is his or her responsibility. SB 510 further clarifies the requirements for the appointment of branch managers including that an employing broker or corporate designated broker may appoint not only another broker licensee but also a salesperson licensee as a manager of a branch office and delegate to that appointed manager responsibility to oversee the day to day operations, supervise the licensed activities of licensees and supervise the clerical staff at the branch provided the appointment is made by a means of a written contract, the licensee has at least two years of full time real estate experience within the prior five years and doesn’t hold a restricted license or been subject to an order of disbarment.
SB 507 (DeSaulnier) Change of Ownership Statement.
SB 507 returns to a topic last addressed by the Legislature in 2009 regarding the late filing of change of ownership statements. In 2009 the Legislature enacted SB 816 (Ducheny) which was intended to close a loophole regarding the requirements for the filing of a change of ownership statement in the event of a change of ownership or change of control of any corporation, partnership, limited liability company or other legal entity which owns real property. Because a change in control could be the basis for a reassessment of the real property held by the affected legal entity, the loophole, which created an economic incentive to delay reporting, was believed to result in a significant loss of property taxes which would be captured once SB 816, which among other things required independent self-reporting, was enacted. SB 507 represents a second stage in this effort to capture property taxes after a change in ownership. This act focuses on Section 480 of the Revenue and Taxation Code which requires the buyer of real property or a manufactured home to file a change of ownership statement with the county in which the property is located. The stated purpose of SB 507 is to encourage timely filings and remove the potential financial incentive for late filings for properties valued over $2.5 million, by increasing the penalty for failure to timely report a change in ownership by raising the cap on this penalty from $2,500 to $5,000 if the property is eligible for the homeowners exemption or $20,000 if the property is not eligible. In order to respond to prior criticisms of early bills that proposed a similar increase which were vetoed by the prior governor, SB 507 extends the time period for filing the change in ownership statement from 45 days to 90 days and provides other modifications regarding the procedures to obtain an abatement of the penalty.
AB 261 (Dickinson) Tax Sales and Prescriptive Easements.
AB 261 falls into the category of new laws that were enacted to correct weaknesses or ambiguities that have been revealed in existing law. In particular AB 261 responds to a recent case that involved a suit to invalidate a tax sale of a 10 foot wide piece of property, which the county in question had six years prior sold after properly noticing the property owners. The changes enacted under AB 261 prevent such a delayed action to rescind a tax sale by requiring persons who challenge the validity of a tax sale to first petition the local board of supervisors for a rescission within one year of the sale. If the board rejects the petition, the person must then commence the proceeding challenging the validity of the tax sale within one year of the rejection. These new requirements apply to tax sales completed on or after January 1, 2012.
This act also clarifies that the provision in Section 3172 of the Revenue and Tax Code which provides that a deed obtained from the tax collector in a sale of tax defaulted property conveys title to the purchaser free of all encumbrances of any kind existing before the sale does not eliminate existing prescriptive easements which are expressly added to the list of exceptions to that provision that survive the sale and the issuance of the tax sale deed.
Purchase and Sale Agreements and Options
SB 110 (Rubio) Seller Disclosures – Mining Operations
SB 110 expands the scope existing disclosure requirements regarding natural and environmental hazards applicable to the seller of residential property under Section 1103.4 of the Civil Code to include mining operations located within one mile of the property. In particular SB 110 requires: (i) an expert who produces a natural hazard disclosure report to determine, utilizing map coordinate data made available by the Office of Mine Reclamation, whether the property is presently located within one mile of a mine operation, and (ii) if that is the case, to include in the report a specified notice regarding the existence of such mining operation. This legislation was sponsored by the California Construction and Industrial Materials Association (CalCIMA) as a protective measure for aggregate mining operations which according CalCIMA are increasingly being encroached upon by residential developments. The intent of this act is to ensure that prospective buyers have knowledge that the property may be subject to inconveniences resulting from mining operations before they complete their transaction, thereby making it harder for them to later oppose these operations. SB 110 serves as added reminder that these type of disclosure requirements often serve the purposes of the disclosers as much as those of the recipient.
SB 284 (Harman) Options and Marketable Title.
SB 284 was sponsored by the California Land Title Association and enacts the recommendation by the California Law Revision Commission to eliminate an apparent gap in California’s Marketable Record Title statute that allows a recorded notice of an option to purchase property to unnecessarily create a cloud on title after the option itself has become obsolete, thus impairing the marketability of the property. This gap was the result of ambiguity in the wording of the prior form of Civil Code Section 884.010 which allowed for confusion with respect to what documents needed to be reviewed to determine whether the option expired according to its own terms. This determination was key for setting when the option expires of record and ceases to be constructive notice, i.e., six months after the option expires of its own terms or six months after the recording of the instrument if the option provides no expiration date. The problem with this prior form of the statute arises where the expiration date of the option is not referenced in the recorded instrument which creates the need to consult off-record documents to make the determination of whether the option included an expiration date. Such off-records documents are often not available. To address this problem, SB 284 effective January 1, 2013 amends Section 884.010 to provide that the key determination is whether the expiration date of the option is ascertainable from the recorded instrument, in which case, the option expires of record six months after that date, or is not ascertainable from the recorded instrument, in which case the option expires of record six months after the date the instrument was recorded. This amended statute makes it imperative for the drafter of the recorded instrument to include the expiration date of the option in that instrument if the intent of the parties is that it will have more than a six month effect.
The area of landlord-tenant law is particularly illustrative this year of the Legislature’s tendency to continue to expand the scope of previously enacted legislation particularly when it protects tenant rights.
SB 332 ( Padilla) Smoking Ban.
SB 332 continues the campaign to extend the ban on smoking in sensitive areas where second hand smoke exposure may occur, in this case to residential dwelling units. This new law codifies the ability of a residential landlord to prohibit smoking of tobacco products on the property or in any building or portion of the building, including any dwelling unit, but adds specific requirements to protect tenant rights in such event. Specifically it requires that residential leases or rental agreements entered into after January 1, 2012 must describe the areas of the property where the landlord has prohibited smoking, if the lessee has not previously occupied the dwelling unit. For leases entered into prior to that date, it provides that a prohibition by the landlord against smoking in any portion of the property where it was previously permitted constitutes a change in the terms of the tenancy requiring proper notice in the manner prescribed in Section 827 of the Civil Code. This latter notice requirement was added to placate concerns that smokers would not have sufficient time to quit smoking or find a new dwelling before the ban took effect and does not specify the amount of time that must elapse after receipt of the notice before the ban is effective. Instead of providing a standard time frame for this notice, this act allows for the incorporation of local policies regarding such notice requirements by specifying that the landlord who prohibits smoking is still subject to federal, state and local requirements governing changes to the terms or residential rental agreements and this act does not preempt any local ordinance that restricts the smoking of tobacco products. Therefore, a landlord in determining what tenant notice period is required in order to ban smoking on a property, will still need to carefully consult local ordinances regarding the prohibition of smoking which vary significantly throughout the state.
SB 337 (Kehoe) Political Signs.
SB 337 is concerned with protecting tenants’ rights to freedom of political expression at their residences which according to the act’s author was not adequately protected. SB 337 follows up on similar laws enacted in 2003 with respect to common interest developments and mobile home parks and prohibits a landlord from prohibiting a tenant from posting or displaying political signs relating to an election or legislative vote, the initiative, referendum or recall process or issues before a public body for a vote. The act requires the tenant to comply with specified guidelines regarding the location and size of such signs and with the time periods for posting and removal of political signs prescribed under applicable local ordinances or in the absence of such ordinances, with reasonable time limits set by the landlord.
It can be anticipated that both these laws will create significant enforcement issues for landlords in the future.
AB 147 (Dickinson) Transportation Mitigation Fees.
AB 147 adds Section 66484.7 to the Government Code that authorizes local public agencies to impose broader transportation related mitigation fees as a condition of approval of a final map or the issuing of a building permit for a new development. The broader fees authorized by AB 147 extend to the funding of transportation mitigation projects beyond the typical roadway or bridge improvements authorized under prior law which the supporters of AB 147 believe will be of particular benefit for infill projects. This act also includes provisions providing for the adoption, allocation, protest and abandonment of the new fees.
AB 208 (Fuentes) Tentative Map Extensions.
AB 208 follows up on similar urgency legislation enacted in 2008 and 2009 that automatically extended the expiration date of specified tentative parcel maps in order to facilitate a housing recovery by sparing developers the added time and expense of obtaining new maps when the market recovers. AB 208 further extends by 24 months the expiration date of any previous approved tentative map or vesting tentative map or parcel map that had not expired as of the effective date of the act which was July 15, 2011 and which would otherwise have expired prior to January 1, 2014. This extension is in addition to the previously granted extensions which are cumulative and includes the automatic two year extension of any legislative, administrative or other approval by any state agency that pertains to the subject development project. It does not, however, expressly extend this extension to federal or local agency project approvals (other than tentative or parcel map approvals) and developers must independently pursue the extension of these important development approvals with the local agencies.
It should also be noted that AB 208 does not extend final subdivision maps which remain subject to statutory expiration terms and loss of any vested rights protections. As was the case in 2009, AB 208 also includes amendments to Section 65961 of the Government Code, the so-called “one-bite-of-the-apple law” that protects certain residential subdivision projects with approved final subdivision maps from the imposition of new conditions for building permit issuance originally for a period of 5 years following the recordation of the final map or parcel map. AB 208 reduces the protection period to 3 years for those tentative maps that are extended by AB 208 or by the prior 2009 legislation.
Eminent Domain and Conservation Easements
SB 238 (Kehoe) Conservation Easement.
In 2009 Governor Schwarzenegger vetoed legislation sponsored by Senator Kehoe that sought to address the growing concern among conservation groups that existing conservation easements lacked adequate protections under the provisions by the California Code of Civil Procedure governing eminent domain actions. Governor Schwarzenegger, in his veto message stated that he believed the legislation would unintentionally impede or discourage vital public infrastructure planning and development.
In 2011 Senator Kehoe reintroduced the legislation in the form of SB 328 which is intended to help preserve the public benefits and environmental value created by conservation easements and prevent the waste of public and charitable resources expended in their creation by providing greater procedural protections for existing conservation easements threatened by eminent domain. In particular, SB 328 adds a new Section 1240.055 to the Code of Civil Procedure which, among other things, requires an agency seeking to acquire property subject to a conservation easement to provide to the holder of the easement a special notice (including a description of the taking and the proposed public use or improvement) at least 105 days prior to the hearing on the resolution of necessity and an opportunity to comment on the acquisition. The new law also requires the holder of the conservation easement to provide notice of the proposed acquisition to any public agency that either (1) provided funds for the purchase of the easement, (2) provided conditions for approval of the easement, or (3) required the provision of the easement as part of a permit approval. Additionally, the new Section 1240.055 specifies that the holder of the conservation easement is entitled to compensation and provides for the determination of fair market value to be separately paid for conservation easements.
Although the law is not substantially different from its earlier versions, Governor Brown did not find it sufficiently threatening to public infrastructure projects to veto it this year.
Common Interest Developments
SB 150 (Correa) Owner’s Rental Rights.
The continuing housing crisis in California has brought into prominence the value of the right of an owner of a separate interest in a common interest development (CID) to rent or lease the property. SB 150, which was sponsored by the California Association of Realtor, responds to an increase in the imposition of new rental restrictions in common interest developments over the past few years by adding Section 1368.2 to the Civil Code that specifies that a owner of a separate interest in a common interest development shall not be subject to a provision in a governing document that prohibits the rental or leasing of any of the separate interests in the development unless that provision was in effect prior to the date the owner acquired title to his or her separate interest. However, this protection only applies to provisions that become effective on or after January 1, 2012, thereby leaving all prohibitions in effect prior to that date unaffected. Basically, SB 150 stems the tide but does not roll its back. SB 150 also requires the owner of a separate interest, prior to exercising the exemption allowed by this act, to provide the association for the common interest development with verification of the date of acquisition and the name and contact information of the prospective tenant. SB 150 further requires the owner of a separate interest in a common interest development where there is a provision in the governing documents that prohibits the rental or leasing of any separate interests in the common interest development to provide a prospective purchaser prior to the transfer of title or execution of a real property sales contract with a statement describing that prohibition on renting or leasing such separate interest.
AB 771 (Butler) Owner’s Disclosures.
AB 771 was a companion bill to SB 150 and also enacts additional new regulations expanding the disclosures that must be made by the owners of separate interests in common interest developments to prospective purchasers of those interests. Specifically, AB 771 requires such owners, in addition to other specific documents, to provide a copy of specified minutes of meetings of the board of directors of the association of the common interest develop, if requested by the purchaser. To facilitate this new delivery requirement, AB 771 requires the association to provide these documents and includes as part of the revisions to Section 1368 of the Civil Code further provisions intended to provide transparency to sellers and buyers regarding the fees that will be required for the production of the various disclosure documents required by Section 1368. In particular, AB 771 among other things requires the association upon receipt of a written request to provide a written or electronic estimate of the fees that it will assess for providing the documents pursuant to a specified form, prohibits an association from charging additional fees for electronic transmission of the documents and requires an association to distinguish the fees associated with the provisions of these documents from any other fees, fines, or assessments the association bills as part of the sale.
SB 563 (Block) Board Meetings.
This act addresses specified aspects of the Open Meeting Act applicable common interest developments that have been identified as developing problems. Specifically, SB 563 prohibits a CID board from conducting meetings via electronic transmission, including e-mail, clarifies that executive sessions are meetings, reduces the notice period for CID board meetings held solely in executive session, and provides standards for teleconference CID board meetings. The general purpose of these changes is to improve the transparency of CID board actions and ensures that members can participate in decisions that affect their lives and property.
A more comprehensive list of all of the legislation tracked each year by the Legislation Committee of the State Bar Real Property Law Section may be found at the Section’s website at http://calbar.ca.gov/rpsection. From there, you can link to some additional sites for keeping up with legislation, including the California Legislative Counsel’s Official California Legislative Information at http://leginfo.ca.gov.
*Robert M. McCormick is a partner at Downey Brand LLP and a member of the Real Estate Practice Management Group. He is also the current Co-Chairman of the Commercial Leasing Subsection (north) of the Real Property Law Section of the State Bar of California. His practice is focused on commercial real estate transactions, including office and retail leasing, acquisitions, real estate secured financing and the formation of common interest developments.
See Reforming CEQA to Encourage Infill Development, Anna C. Shinko and Matthew D. Francois, California Real Property Journal, Volume 29 Number 2, pp 42-47. Note that buyers typically file a Preliminary Change in Ownership Report (PCOR) at the time the transfer of the property is recorded in which event the COS is not required. Both the COS and PCOR which is almost identical, provide information to the county assessor necessary to value the transferred property for property reassessment purposes and the applicability of any exclusions from property reassessments.
Originally published in the California Real Property Journal (February 2012)