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AIR CRE is best known for its contract forms, resources and networking opportunities. The organization is also outspoken on the political front, being supportive of, or fighting against, legislation that impacts the commercial real estate industry.
On Aug. 8, 2018, AIR CRE partnered with the California Business Properties Association (CBPA) to present an informative webinar. During the 50-minute long presentation, Tim Hayes (AIR CRE Executive Director), Rex Hime (CBPA President and CEO) and Matt Hargrove (CBPA Senior Vice President of Governmental Affairs) provided updates on current legislation, and initiatives for AIR CRE members to watch out for – and to lend support to.
Propositions to Support
Two important CBPA-supported acts will be on the November ballot – Propositions 3 and 5.
If passed, Proposition 3 – The Water Supply Act and Water Quality Act of 2018 – would free up $8.9 billion in general obligation bonds to fund projects boosting water supply and quality, among other things. “Anyone living in California understands there is never enough water in the state,” Hime said. “The state is finally on the right track, allocating dollars for reservoirs and ensuring that water continues to flow.”
Meanwhile, Proposition 5 – The Property Tax Transfer Initiative – would amend Proposition 13 to allow home buyers age 55 or older, or are who severely disabled, to transfer tax assessments from a prior home to a new home, no matter the market value or size of the new property. This proposition addresses the fact that, older people might want to downsize, but could face huge property taxes if they buy a new home. Furthermore, if senior citizens sell their houses and move to smaller spaces, it could help alleviate the housing shortage by freeing up modest-priced homes for younger families.
Also on the Ballot: Candidates
California will have a new governor in November, and it will either be Lieutenant Governor Gavin Newsome or businessman John H. Cox. While Hime didn’t indicate which side CBPA supports, he indicated that the organization and other associations reached out to both candidates to participate in potential events. One such event would be a meeting to analyze position papers; Hime indicated that Newsome is willing and “we should hear back shortly from Cox.”
Meanwhile, on the U.S. Senate side, four-term Democratic incumbent Dianne Feinstein will face Democratic challenger and California State Senator Kevin de Leon. Hime didn’t equivocate here, indicating that Feinstein was the clear choice, due to her support of water and land issues, and a solid understanding of the commercial real estate industry. “DeLeon has not been a friend to our industry,” Hime said.
Leave Behinds and Real Estate Separation
Out of the thousands of bills currently in circulation, the CBPA supported two.
AB 2173 addressed what happens to property left behind when a tenant moves out. When this happens, the landlord auctions off the property, but can only receive up to $750 for it. “That’s not enough for clean-up, disposal or the auction process,” Hargrove observed. AB 2173 lifted that threshold to $2,500, “or an amount equal to one month’s rent for the premises the tenant occupied, whichever is greater.”
Noted Hargrove: “This is something that will help us be more effective as to how we do business.”
Then there was AB 2847, an attempt to separate areas of the code in which commercial real estate and residential real estate are lumped together. Hargrove indicated that, as residential tends to be more restrictive, “we want to separate commercial from residential codes. This is a long-term effort, but will help protect our industry, especially as we see more aggressive attempts on things like rent control.”
Then there are bills that could spark some controversy, one of which is SB 937 and lactation rooms. “SB 937 requires businesses to provide lactation facilities for their workers, requires that lactation facilities be built in new construction, and ensures employees receive information about their rights to a safe and comfortable lactation space at work.”
The problem, however, is that the cost for this amenity goes to the building owner, who will likely spend between $30,000-$130,000 for this mandate. “We’re opposing it,” Hargrove said. The CBPA instead is suggesting an alternative, one that places the onus for a lactation room on a business owner, rather than building owner.
Then there is AB 1427, which focuses on ensuring enough adequate housing for veterans. “We’re not trying to throw up roadblocks against veterans, but we want to make sure that we aren’t going to be sued by what’s being passed.”
What is a Broker?
Defining a commercial real estate broker seems to be a regular activity in the California legislature, with AB 749 and AB 1289 two acts geared to clarify the issue. AB 749 redefines the term “salesperson” as one who is retained by a licensed real estate broker to “perform certain real estate activities subject to a broker’s supervision.” Meanwhile, AB 1289 clarifies the definition of an “agent” when it comes to real estate transactions.
Hargrove said that both bills stalled, but might be re-introduced in 2019. Basically, the bills tweak “some of the language in the brokerage area that would define who a broker is, and what you can do more efficiently under the professions act,” he said.
Lurking in the Shadows
In addition to the cache of proposed and passed acts, many important to the CRE industry are lying in wait. The California Schools and Local Communities Funding Act of 2018 will be put on the November 2020 ballot. Hargrove was adamant that the opposition to this bill needed to start now. Known as the “Split-Roll Tax” act, the legislation would re-amend Proposition 13 by separating commercial real estate from residential real estate, and drastically increasing tax assessments among the former.
AB 1059 – the dual agency bill – was successfully stopped in its tracks. “AIR CRE was instrumental in helping us stop it this past year, but we’re still keeping an eye on it,” Hargrove said. AB 1059 put restrictions on brokers from the same company working different sides of the same real estate deal.
Not all issues potentially impacting CRE have to do with legislation, however. The California Supreme Court decision, Dynamex Operations West Inc. v Superior Court of Los Angeles, could have huge ramifications. The case focused on whether workers should be classified as employees or independent contractors for purposes of wage orders adopted by California’s Industrial Welfare Commission – and the California Supreme Court said yes, all workers are employees, unless they can be proved contractors via an “ABC” text.
“I’m not sure how that will play out in the real world,” Hargrove noted. “But any of you who deal with independent contractors will possibly have pressures to treat that person or company as part of your own.”
Then there is the long-established Title 24, the Building Energy Efficiency Standards. These days, pulling a permit for tenant improvements can “trigger” a total rewiring of a tenant space, which is not cheap.
“Environmental groups and contractors are spending several million dollars to ensure the energy code becomes stricter,” Hargrove commented. “We need to be engaged in this upfront, or else we’ll be dealing with it five years from now, and wondering why a light switch is costing $10.”
A Need for Assistance
While CBPA is fighting hard on behalf of CRE, “the CBPA and AIR can only do so much,” said AIR CRE’s Hayes. Ways in which members can assist, he went on to say, include donations and contacting elected officials. “If we all sit by and figure CPBA will handle everything for us,” he added, “We run the risk of getting bills passed that are detrimental to the commercial real estate industry.”
CA CRE Legislative Updates
By Rex Hime, President and CEO, and Matthew Hargrove, Senior VP of Governmental Affairs
California Business Properties Association (CBPA)
MAJOR IMPACT ISSUES
Commercial Tax Lawsuit
In conjunction with the Howard Jarvis Taxpayers Association (HJTA), CBPA, BOMA California, and the California Business Roundtable have filed suit in the Superior Court in San Francisco challenging the city’s special tax on commercial property (Proposition C – passed in June 2018), which is an illegal and punitive gross receipts levy which will reduce commercial property values in the city by up to 12%.
Our lawsuit asserts that because the tax is expressly for a special purpose, it required a 2/3 vote of the city’s electorate under Propositions 13 and 218. But it did not pass by that margin. Rather, the tax proposal, designated as Measure C, received a scant 50.87% vote.
The basis for the lawsuit is that the California Constitution clearly holds that special taxes at the local level have required a two-thirds vote of the electorate as mandated by Propositions 13 and 218.
Proposition 10 – Rent Control (Nov 2018 Ballot Initiative)
The campaign to end the Costa Hawkins Rental Housing Act that has restricted rent control measures in the state and allow the expansion of rent control oversight to single family residences is on the ballot for this November and we vigorously oppose the measure.
CBPA serves as a Co-Chair of the “No on Prop. 10” campaign and is actively participating in the management and direction of the effort. Fundraising is the key component now as polling indicates if we can deliver our message with the right messengers the effort can be defeated. Again, be prepared to give!
This proposition is bigger than just residential rent control and presents and existential threat to your businesses. If Prop. 10 passes in November it only takes 41 votes in the Assembly and 21 votes in the Senate with the signature of the Governor to overturn the current prohibition of commercial rent control in California we helped codify in the late 80’s.
If Prop 10 passes there will be commercial rent control almost immediately in most major cities in California.
AB 802 – CA Mandatory Benchmarking Law
California’s mandatory commercial building benchmarking law is one of the topics CBPA is contacted about the most and since the law finally went into place on June 1, of this year.
CBPA has been directly working on the issue since 2007 when AB 1103 passed the Legislature and was signed into law by then Governor Schwarzenegger, over our industry’s strenuous objections. We weren’t opposed to benchmarking, per se, but believed the way the bill was going to be difficult to implement in that it required every non-residential building in the State of California to be benchmarked. Period. No flexibility.
Our warnings that such a sweeping mandate would be an overwhelming regulation to implement came to fruition and after several years the complicated process was abandoned, and stakeholders were brought together to start over and write a statute – that retained the “mandate” but did so in a manner that could work in the Real World.
The result was that in 2015 the original statute placed on the books by AB 1103 was repealed and new, more flexible statutory language was signed into law by Governor Brown in the form of AB 802. That bill re-calibrated the regulatory process and addressed complaints our industry has had with the original law.
As of now, with some exceptions, buildings that are 50K sf or larger must use Energy Star to benchmark and report the data to the Energy Commission.
CBPA has organized webinars, FAQs, and have provided more than 30 notifications to members about the program.
Dynamex Supreme Court Decision – Independent Contractors
In April 2018, the California Supreme Court issued its decision in Dynamex Operations West v. Superior Court and departed from nearly 30 years of established California law regarding independent contractors.
This unprecedented judicially-created standard to differentiate contractors from employees effectively undercuts nearly two million independent workers and how they interact with the companies that hire them. This would not only impact the millions of Californians who choose to work independently but would have a chilling and harmful impact on our economy.
CBPA is working closely with the Cal Chamber, NFIB, and other business groups to ask the Legislature and Governor to fix this ruling.
SPONSORED BILLS SIGNED INTO LAW
AB 2173 (Santiago; D-Los Angeles)
Sponsored by CBPA and signed into law by Governor Brown in July, this bill updates the state’s commercial abandoned property laws by increasing the threshold amount needed to trigger an official disposition (auction) process. The new threshold is now $2,500 or an amount equal to one month’s rent for the premises the tenant occupied, whichever is greater.
Under current law, a commercial property owner/manager is obligated to go through an expensive public notification and auction when a business moves out and leaves behind unwanted items, believed to be $750 or more in value or the equivalent of $1 per square foot of the rental for the property, whichever is less.
If a company moves out of a leased space and purposefully abandons property (i.e. old shelving, a few desks and chairs, or obsolete computer equipment) that low threshold is very easily met and triggers an expensive auction process for a relatively small amount of money on items that were unwanted to begin with.
Due to AB 2173, state law now better reflects the practical realities in the commercial real estate industry by setting a new commercial threshold. This proposed new threshold amount more appropriately aligns with the actual costs of storage and disposal of abandoned property in commercial real estate.
AB 2847 (Rubio; D-Baldwin Park)
Sponsored by CBPA and signed into law by Governor Brown in July, this bill continues the effort to separate commercial from residential sections in statute where it does not make sense to have them intermingled.
Clarifies that current Civil Code §1951.3 pertains to residential real estate only and creates a new section mirroring it to deal with commercial. This fix was needed as the statute provided certain obligations/protections for residential owners/tenants without parallel in commercial context.
OTHER BILLS CBPA HAD A MAJOR IMPACT ON
AB 1857 (Nazarian; D-North Hollywood) Building codes: earthquake safety: immediate occupancy standard.
Originally this bill would have required all building in the state increase their seismic “safety” by a factor of 150%. Very expensive and impossible to implement. CBPA worked to amend the bill in a manner that no longer threatens our industry.
AB 2618 (Bonta; D-Alameda) Hiring of real property: Department of Consumer Affairs: landlords and property managers: training.
This bill originally would have required all properties – including commercial – to certify owners and onsite managers about fair housing practices, obligations of landlords, and tenant rights. CBPA worked to fix the measure and ultimately kill it in committee.
AB 2648 (Friedman; D-Glendale) Civil actions: limitations: real property.
Would have expanded the statute of limitations for actions brought to recover damages from any company who develops real property or performs or furnishes the design, specifications, surveying, planning, supervision, testing, or observation of construction or construction of an improvement to real property more than 10 years after completion. We worked to kill the bill.
AB 2681 (Nazarian; D-North Hollywood) Seismic safety: potentially vulnerable buildings.
Originally this bill mandated all local building departments inspect buildings and compile a list of “red tagged” buildings that potentially did not meet current seismic standards and publish the information. It was meant to shame building owners into seismic upgrades above and beyond “life safety.” Would have been extremely expensive and provided incentives for tenants to re-negotiate long term loans. CBPA worked to fix the bill in a manner that addressed the major concerns.
AB 2731(Gipson; D-Carson) Carried Interest Tax Increase.
This bill would impose a tax of 17% on that portion of an individual’s taxable income derived from an investment management services interest (“carried interest”). This measure would be devastating to anyone that develops property. CBPA worked hard to kill this bill.
AB 3001 (Bonta; D-Alameda) Zero-emissions building mandate.
This bill sought to force certain commercial buildings to become “zero-net energy” and would have put all commercial projects at a disadvantage by changing the state’s “cost effectiveness” calculation to include “societal benefits.” I.E. the state would be able to mandate even more expensive code changes by claiming it helped reduced greenhouse gas impacts. CBPA worked hard to kill this bill early in the process.
AB 3232 (Friedman; D-Glendale) Zero-emissions buildings and natural gas ban.
Among other things related to “zero-net” energy, this bill would have effectively banned natural gas from use in commercial buildings. New buildings and retroactively. CBPA has worked to amend the bill in a manner that removes our industry concerns.
SB 1397 (Hill; D-San Mateo) Automated external defibrillators Mandate.
CBPA has negotiated with the legislature on this bill that will require AEDs in certain existing buildings upon the completion of a Tenant Improvement. CBPA’s negotiations has kept the numbers of AED’s that will be required down to 1 per building and only on TI’s of $100K or more, saving thousands of dollars for every building in the state.
TRANSACTION / BROKER SPECIFIC MEASURES
AB 482 (Mullin; D-South San Francisco) Real estate brokers.
This bill would exempt from the definition of broker a person who works as a regular officer of a nonprofit limited liability company that provides affordable housing through a housing development. CBPA opposed the bill and it is now dead.
AB 1284 (Dababneh; D) Property Assessed Clean Energy program: program administrators.
This bill requires more transparency and disclosures by PACE program administrators. CBPA supported the bill which was signed into law.
SB 764 (Moorlach; R-Costa Mesa) Real estate trust fund accounts: fidelity insurance.
Authorizes a real estate broker to use insurance in lieu of fidelity bonds to cover an unlicensed employee who is authorized to withdraw money from that broker’s trust fund account. The bill specifies that the bond or insurance coverage must protect the broker from intentional wrongful acts committed by his or her employee, including theft, dishonest acts, or forgery. CBPA supported this measure which has been signed into law by Governor Brown.