LOCAL LANDLORDS: TAKE NOTE OF THE CITY OF LOS ANGELES’ NEW “CASH FOR KEYS” ORDINANCE

Buyers of residential rental properties occasionally consider as one of the ways to increase their investment return the approach of paying existing tenants whose rents are low an amount to vacate voluntarily.  This is also a technique some landlords who have owned their properties a while utilize in an effort to enhance cash flow.  The practice is commonly known as a “buyout” or “cash for keys.”

While cash for keys can in some circumstances be effective and lawful, it has now become the subject of widespread abuse.  Landlords have started to use the technique to try to sidestep rent stabilization regulations pertaining to vacancy decontrol and relocation assistance (such as the one in the City of Los Angeles requiring relocation payments between $7,900 and $19,700 and at least sixty days’ advance notice, more for elderly and disabled occupants).  Other situations where this has been observed as a technique to exploit tenants who do not know their rights include conversion of an apartment project to condominiums, taking units off the market under the Ellis Act and renovation or demolition of some or all of the structures on the site.

The response to these abuses in Berkeley, San Francisco and a number of other California municipalities has been to enact ordinances designed to curb predatory practices.  The City of Los Angeles has just passed legislation of the same type named the “Tenant Buyout Ordinance.”  Any landlord seeking to offer a tenant cash for keys for residential rental property in the City now must comply with the following rules:

  1. The landlord must provide any such tenant a written disclosure of the tenant’s legal rights, including applicable relocation assistance amounts.
  1. Buyout amounts must be written in the tenant’s primary language and must specify that the tenant has a thirty-day right to rescind without penalty any buyout agreement entered into with the landlord.
  1. Buyout agreements are to be in writing and filed with the Los Angeles Housing and Community Investment Department.

We do not yet know what will be the City’s enforcement penalties and whether they will be as substantial for technical or negligent violations as for to intentional ignoring of the new ordinance.  For example, what happens if the tenant signs an agreement written in English and more than thirty days later says that his “primary language” is Vietnamese?  What happens if the tenant has vacated and moved into a new residence before the tenant learns that the landlord did not fully or accurately comply with the ordinance?  These and a number of other questions will need to be addressed in real life situations.  We expect to learn more soon.  Stay tuned!

NEW DISABILITY ACCESS LEGISLATION TAKES EFFECT NEXT WEEK: READ THIS TO BE PREPARED

If you own commercial rental real estate in California, you need to be aware of new state legislation becoming operative next week in connection with disability access for your tenants.  Even if you comply fully with ADA and other federal disability access guidelines, the new California rules will apply.

The new legislation, AB 2903, relates to and amends Civil Code Section 1938.  When enacted in 2013, Section 1938 read as follows:

“A commercial property owner or lessor shall state on every lease form or rental agreement executed on or after July 1, 2013, whether the property being leased or rented has undergone inspection by a Certified Access Specialist (CASp) and, if so, whether the property has or has not been determined to meet all applicable construction-related accessibility standards pursuant to Section 55.53.”

The statute as enacted in 2013, which we discussed in an issue of The Joe Cobert Report dated on May 7 of that year, did not mandate that the owner or lessor (hereafter the “landlord”) actually hire a CASp or perform an inspection.  It only required disclosure to the tenant in the lease document itself whether, in fact, a CASp had been retained.

Up to now, Section 1938 has been easy to comply with.  We all added the disclosure language to our commercial leases and not many of us percentage-wise actually hired CASp inspectors.  Even though the new law still does not mandate hiring a CASp, its requirements have specified changes to Section 1938 as to any commercial lease executed on or after January 1, 2017.  We summarize those changes below:

  1. If the subject premises has been inspected by a CASp, and if the landlord is aware of alterations since the inspection which have “impacted compliance” with accessibility standards, the landlord must provide to prospective tenants — prior to execution of the lease — a copy of any report prepared by the CASp.
  1. If there is a report and it is not provided to the prospective tenant at least 48 hours before lease execution, the tenant has 72 hours after execution to rescind based upon information in the report.
  1. Unless otherwise agreed to by the prospective tenant, making repairs or modifications necessary to correct access violations is presumed to be the responsibility of the landlord.
  1. If the subject premises has received an inspection report showing that it meets applicable California access standards, the landlord must deliver to the prospective tenant — at least seven days before lease execution — a current “disability access inspection certificate.”
  1. If no disability access inspection certificate has been issued for the subject premises, the following language must be set out in the lease itself:

“A Certificate Access Specialist (CASp) can inspect the subject premises and determine whether the subject premises comply with all of the applicable construction-related accessibility standards under state law.  Although state law does not require a CASp inspection of the subject premises, the commercial property owner or lessor may not prohibit the lessee or tenant from obtaining a CASp inspection of the subject premises for the occupancy or potential occupancy of the lessee or tenant, if requested by the lessee or tenant.  The parties shall mutually agree on the arrangements for the time and manner of the CASp inspection, the payment of the fee for the CASp inspection, and the cost of making any repairs necessary to correct violations of construction-related accessibility standards within the premises.”

What does all this mean for you if you own commercial realty in California?  Whether or not you intend to hire a CASp, you will be affected in regard to all rental agreements executed beginning on January 1 for any type of non-residential real property.  We invite our members to contact Joe Cobert to discuss the specifics of how the new law will impact you, what are apparent loopholes and ambiguities in the legislation and more.  We will also furnish updates about Section 1938 in future issues of this newsletter.

CALIFORNIA SUPREME COURT RULING ON “DUAL AGENTS”

The California Supreme Court made a ruling on Monday which had been long awaited in the real estate industry.  It pertained to the subject of “dual agency,” when a broker “has both sides” of a real estate sales transaction (that is, concurrently representing buyer and seller), and specifically the fiduciary duties which may result therefrom when one sales agent working for the broker represents the buyer and another working for the same broker represents the seller.

The ruling was made in a case named Horiike v. Coldwell Banker Residential Brokerage Co., stemming from Plaintiff Hiroshi Horiike=s purchase of a luxury Malibu residence for $12,250,000.  In the transaction, Coldwell Banker=s salesperson Chris Cortazzo represented the seller and another Coldwell Banker salesman (named Chizuko Namba) represented Horiike as buyer.

Under California law, a real estate broker must disclose whether it is acting as a dual agent and, if so, the broker must inform the parties that as a dual agent it owes fiduciary duties to both buyer and seller.  If a sales agent or “associate licensee” acts for the broker, the salesman’s duty to each party to the transaction is, according to statute, “equivalent to the duty owed that party by the broker for whom the [salesperson] functions. ”

Horiike alleged in his suit that a flyer and other marketing materials (including the MLS listing) for the property which were given him during the transaction represented that the property offered “approximately 15,000 square feet of living areas. ”  The seller, a family trust, had engaged Cortazzo to sell the property.  He obtained public record information from the tax assessor’s office which states that the property=s living area was 9,434 square feet and also procured a copy of the residence=s building report which described the property as consisting of a single-family residence of 9,224 square feet, a guesthouse at 746 square feet, a garage of 1,080 square feet and a basement of unspecified area.  However, in the MLS listing, Cortazzo stated that the property included “approximately 15,000 square feet of living areas. ”

Cortazzo gave Horiike an “advisory” stating that the buyer should verify square footage, recommending that he hire an appraiser or licensed surveyor and reciting that “Broker . . . [s]hall not be responsible for verifying square footage. ”

Two years after escrow closed, when Horiike was preparing to do construction, he reviewed the building permit and noticed the discrepancy in square footage between that document and the MLS listing and flyer he received from Cortazzo.  Horiike then filed suit against Cortazzo and Coldwell Banker claiming, among other things, that both of those defendants had breached their fiduciary duties to Horiike “either deliberately misrepresenting the square footage . . . and failing to act with the utmost care, integrity and honesty as to Horiike and/or [making the representations negligently] . . . . ”

The lawsuit was tried to a jury.  Cortazzo argued that, as the seller’s agent, he possessed no fiduciary duty to Horiike as the buyer.  At the end of Horiike’s case, Cortazzo moved for nonsuit on the cause of action for breach of fiduciary duty and the trial judge granted the motion predicated on Cortazzo’s argument.  The cause of action for breach of fiduciary duty was dismissed as to Cortazzo.

The trial court instructed the jury that, in order to find Coldwell Banker liable for breach of fiduciary duty, it had to find some individual sales agent responsible for breach of fiduciary duty too.  Horiike had stipulated that he had not acted on the basis of conduct by Namba, his salesman.  With the claim against Cortazzo dismissed and with there being no other agent involved, the jury was compelled to decide in favor of Coldwell Banker on the breach of fiduciary duty count.

Horiike appealed.  The Second District Court of Appeal reversed and decided in Horiike=s favor.  The Supreme Court, in unanimously affirming what the appellate tribunal had determined, indicated that “when an associate licensee represents a brokerage in a real property transaction, his or her duties are the same as the brokerage. ”  In what it recognized as a matter of first impression, the high court stated:

“It is undisputed that Coldwell Banker owed a fiduciary duty to Horiike, including a duty to learn and disclose all information materially affecting the value or desirability of the residence . . . .  That duty extended to information known only to Cortazzo, since a broker is presumed to be aware of the facts known to its salespersons.”

The result is that the case is now reinstated against both Cortazzo and Coldwell Banker.

Why is this decision significant?  Because it may impact the now widespread pursuit of dual agency by firms wanting 100% of the commission.  Indeed, in light of the fact that the California real estate brokerage industry today has a number of very large brokerage firms, the result is often that, as in Horiike, agents from the same brokerage company represent both sides of the transaction.  Most agents have up to now really believed that the conflict of interest this creates is merely a concern for the brokerage house, not for either sales agent.  The Horiike decision seems to say that, if the broker is the same for both sides, sales agents cannot insulate themselves by saying that their fiduciary duties are limited exclusively to the party they represented, even though the statute provides that each party is entitled to the “undivided loyalty of an exclusive salesperson, . . . . ”

Will the Horiike decision discourage dual agency?  We at the firm doubt it.  However, the decision will likely result in more disclaimers and documentation designed to protect the brokerage community as fast as the California Association of Realtors can write and circulate that paperwork.  How far will this go from here?  We’ll see.  And Joe Cobert’s firm will keep you informed.

READER UPDATE ON DELAYED EFFECTIVE DATE FOR ORDINANCE INCREASING “QUIMBY” FEES

On September 20, 2016, The Joe Cobert Report described the new ordinance increasing park and recreation (“Quimby”) fees for multifamily development projects in the City of Los Angeles.  The “effective date” at such time appeared to be set at October 20, 2016 (next month).  In that newsletter, we advised that we would keep our readers informed of any changes as to that ordinance.

There has indeed been a change already.  The L.A. City Attorney and the City Council have decided to delay the effective date of the ordinance until January 11, 2017.  That is also the date when the new Quimby fees will become applicable to all projects in the “pipeline” unless they qualify for exemption.  That exemption still reads as follows:

“Any project that would otherwise be subject to a park fee but has acquired vested rights under Section 12.26 A.3 of this Code prior to the effective date of this Ordinance, and/or has an approved vesting tentative tract map per Section 17.15, the application for which has been deemed complete prior to the effective date of this Ordinance, shall not be subject to a park fee.”

If you have a development project in the review and/or tentative map approval process with the City of Los Angeles, we urge that you promptly verify whether the City deems the map application complete as well as the status and timeline of your project in the acquisition of vested rights.

The Joe Cobert Report will continue to monitor the ordinance and any further revisions thereto, keeping our readers up to date.

LOS ANGELES DESPERATELY NEEDS MORE AFFORDABLE HOUSING AS WELL AS MORE PARK AND RECREATIONAL AREAS: A NEW ORDINANCE SEEKS TO ADDRESS THESE TWO POTENTIALLY COMPETING NEEDS BY RAISING DEVELOPMENT FEES

The City of Los Angeles has for many years been faced with a planning dilemma, lagging far behind all other major U.S. cities in green space and affordable housing.  The local development boom has not substantially alleviated the problem and may have even added to it.  In response, the City has recently passed legislation, Ordinance No. 184505 (the “Parks Dedication and Fee Ordinance”), which tries to strike a new balance between housing and open space considerations.  It sets out a revised version of the City’s park or “Quimby” fee requirements.  Its provisions extend to apartment projects as well as condominium developments.  The amount and scope of those fees will be increased on the premise that those funds will help pay for steps to mitigate the impacts which ongoing residential development will have on parks and other recreational areas, even as the City continues to encourage additional multi-family construction.

A colleague of Joe Cobert, Craig Lawson, a highly regarded and knowledgeable land use consultant in Los Angeles (and a reader of The Joe Cobert Report), has written a terrific summary of the terms of the new ordinance, both its coverage and its exemptions.  With his permission, we have sent a copy to the readers of The Joe Cobert Reort.

Note that the ordinance is not scheduled to be fully operative until February of 2017, 120 days after the currently prescribed “effective date” of October 20, 2016.  The October date is very important right now because the exemption is tied to the effective date.  The exemption reads as follows:

“Any project that would otherwise be subject to a park fee but has acquired vested rights under Section 12.26 A.3 of this Code prior to the effective date of this Ordinance, and/or has an approved vesting tentative tract map per Section 17.15, the application for which has been deemed complete prior to the effective date of this Ordinance, shall not be subject to a park fee.”

Clearly, absent modification of the Ordinance in the next few weeks, anyone who has a project “in the pipeline” in the City of Los Angeles needs to do everything possible to move the project to an exempt status in the next 30 days (by October 19).

The Joe Cobert Report will keep you informed about the Ordinance and the various issues raised thereby.

DOES THE IRS HAVE A BIAS AGAINST MARRIED COUPLES WHEN IT COMES TO INCOME TAX?

For many years, there has been a disparity between the income tax treatment of married couples and the treatment pertaining to two cohabiting singles, usually to the advantage of the unmarried pair.  This has been termed the “marriage penalty.”  There have been many  proposals to Congress to change this and equalize the treatment.  Not only has that not occurred but, quite recently, that penalty has been extended to yet another situation — deducting interest on certain very large mortgages.  If you represent high earner/high net worth individuals, this is an important issue to know about.

Under existing law for many years, married couples who bought a principal residence have been permitted to deduct the interest paid on a purchase money loan up to $1,000,000 of acquisition indebtedness.  They can also deduct the interest paid on as much as $100,000 of debt for a home equity loan (if taken out to make improvements on that residence).  That means the maximum amount on which married couples could deduct interest is $1,100,000, and this is so whether the spouses file jointly or separately.

However, what about a pair of cohabiting singles who buy a home together using a large acquisition loan and who take out a home equity loan?  Wouldn’t you think that the amounts of deductible interest for the two couples should be the same irrespective of marital status?  Guess what — they aren’t.  The U.S. Tax Court so concluded in a case from California (the “Voss case”), reversing earlier authority, and last year the Ninth Circuit Court of Appeals upheld that Tax Court determination.  Rather than fight it, the IRS recently acquiesced; and in a ruling identified as “Action on Decision 2016-02,” the IRS extended the determination from the Voss case to all jurisdictions in the United States.  This means that each of the individuals in the unmarried couple gets to deduct interest on up to $1,100,000 of qualified indebtedness so that this unmarried pair — even if cohabiting in a sexual relationship — would be permitted to deduct interest on as much as $2,200,000, twice as much as the married couple!  Will this significantly impact decisions about marriage by some of the very rich?  Will it finally prompt Congress to change the rules?

If you want more information on this topic, contact the firm, Joseph M. Cobert, A Professional Corporation.

AN UPDATE ON LEGISLATION AFFECTING ENERGY USAGE IN AND SAFETY OF BUILDINGS IN LOS ANGELES

In the past two to three months, both the State of California and the City of Los Angeles have enacted measures affecting a large number of buildings locally.  The impact of the legislation will be pronounced, although implementation thereof will be spread out over a number of years.

AB 1103 Is Out

For the last couple of years, we have been faced with potential compliance and disclosure requirements with regard to energy usage in certain commercial buildings in the State.  That legislation, AB 1103, produced a lot of controversy.  It was made applicable at first to sales and leases of certain types of single-occupant structures with large floor-space square footage.  The size of buildings requiring the disclosures was then reduced, making it applicable to a greater number of structures.  As its scope was about to be extended even further, to single-occupant buildings with less than 5,000 square feet of floor space, it became clear that its enforcement would be problematical.  The California Energy Commission (“CEC”), the regulatory agency in charge, decided to re-evaluate what should be the scope, and timing of implementation, of measures for these smaller locations and so the CEC postponed compliance dates.

Finally, rather than try to modify the existing legislation, the CEC drafted and the State Legislature enacted legislation scrapping AB 1103 entirely, effective as of January 1, 2016.  What will replace it is at the moment unclear.  The legislation involved, AB 802, provides for rules to be developed over the next year and to take effect January 1, 2017.

In the meantime, the City of Los Angeles is working on its own energy disclosure regulations.  Those pertaining to city-owned buildings are targeted to be put into place sometime this year, while those for privately owned buildings (at least ones having over 50,000 square feet) are expected to come into effect in 2017.

Ordinance 183893

The City of Los Angeles has ratcheted up its retrofit requirements by passing Ordinance 183893, enacted with earthquake concerns in mind.  There are two programs.  One addresses so-called “soft-story” buildings, multi-story structures with weak and/or open-front wall lines (most notably those with “tuck-under” parking).  The other focuses on “non-ductile concrete structures,” older concrete buildings which were not designed to withstand major lateral force movement in earthquakes.  The types of properties affected by each such program, and the compliance deadlines, are described briefly in the two attached publications from the Los Angeles Department of Building and Safety (“LADBS”).  These were among the items covered by Raymond Chan, currently the head of the LADBS, when he was a guest speaker this past November at Joe Cobert’s Real Estate Finance class at UCLA Extension.

For more information and advice on specific properties, feel free to contact Joe and the Firm.

YOU THINK ALL RESIDENTIAL LANDLORD-TENANT DISPUTES ARE THE SAME AND BORING? NOT THIS ONE

Our focus in this piece is a trial court case for wrongful eviction entitled Follingstad v. Lama, filed in San Francisco about three weeks ago.  That lawsuit, at first seemingly like many others brought over the years by tenants who believe that they were ousted unjustly, is anything but typical.  It is fascinating because it features so many real estate topics right out of today’s news.

The case arose amid the enormous surge of property values and rising rents currently taking place in the Bay Area.  Besides the whole subject of lack of affordable housing and the growing economic/power disparity between landlords and tenants in strong California markets, the Follingstad lawsuit has a little of most everything.  Most notably, it brings into play the dynamics of all of these topics:

  1. a long-term tenant in a rent-controlled unit;
  2. an illegal unit in the building;
  3. the tenant’s pre-eviction listing of her unit with short-term rental giant Airbnb; and
  4. a rather suspect landlord who had recently purchased the building involved.

Follingstad had been paying $2,145 per month for an apartment in what was ostensibly to the outside world a duplex.  As a multiple-unit property, it would be covered by San Francisco’s rent ordinance and would therefore be subject to rent control.  That ordinance currently limits increases in monthly rent as to rent-controlled units to 1.9% during the present year.

Like the regulations in the City of Los Angeles, the San Francisco ordinance excludes single-family dwellings.  Remember that; it is key here.

Enter Lama as the new owner of the property.  Immediately, Lama as landlord issues to Follingstad a “notice of change of terms of tenancy” providing for a rent increase from $2,145 to $8,900 per month — more than 300%!

But wait!  It turns out that the other unit in the property was not lawful.  It was an illegally converted and unpermitted “in-law” unit.  Lama, a “sneaky” but crafty investor, took the illegal second unit — then unoccupied — off the market and declared the building (which also has a garage) to be a single-family house.  (To add to her approach, Lama actually removed the toilet and kitchen sink from the second unit, making it “uninhabitable” under state and local law.)

Lama then moved into the premises rather than renting out the now single-unit house.  This may have been the flaw in her otherwise clever scheme.  Why?  Because that made the eviction one predicated upon “owner move-in” instead of one for nonpayment of rent; and San Francisco, like Los Angeles, requires a “relocation payment” on an owner move-in whereas there is no payment required where the tenant has failed to pay the rent or is evicted for other “just cause.”  San Francisco’s relocation payment is $5,551 per tenant (plus $3,701 more for each tenant who meets the ordinance’s definition of “senior” or “disabled”).

The case is pending and, besides the issues described above, potentially raises some interesting questions.  For example, what would have been the outcome had Follingstad stayed in occupancy and forced Lama to pursue an unlawful detainer?  What if Lama had used as her ground to evict Follingstad the latter’s attempt to rent out the unit on a short-term basis through Airbnb (alleging that this was an unpermitted attempt to sublease)?  What would have been Follingstad’s rights if Lama had, instead of moving in, re-rented the building to a legitimate lessee as a single-family house?  Is there any possibility that a court would decide that the eviction was improper because it was unconscionable or, at least, inequitable?

In a hot rental market, there may be other cases arising which will address some of these open questions.  We at The Joe Cobert Report will let you know what happens in Follingstad as well as other cases which deal with some of these open questions.

THE “SHORT-TERM” RENTAL: A GROWING CHALLENGE FOR CALIFORNIA’S HOUSING COMMUNITIES

The term “short-term” rental is generally used to refer to the leasing of housing units (or portions thereof) for a period of fewer than 30 consecutive days. Sometimes such arrangements are known as “vacation rentals” because the leased location is utilized by travelers in lieu of traditional hospitality properties like hotels and inns. The use of these arrangements has spawned an industry providing information and bookings by internet communications with companies like Airbnb, VRBO and Homeaway.

State Laws

At the moment, there is no statewide California legislation focusing on short-term rentals, although some bills are pending in Sacramento addressing various topics pertaining to these types of temporary housing. There is also likely to be a measure on the November 2015 ballot statewide. One measure collecting signatures to get on the ballot contains provisions calling for the owners of short-term rentals where they are lawful to report periodically (probably quarterly) to city and county agencies in the local jurisdictions, with substantial fines for failure to do so.

While most of the potential efforts to spell out regulations are designed to limit and/or tax the short-term rental industry — which at present is exempt from “occupancy” or “transient” taxes in most localities — there is some industry pushback in proposed legislation too. For example, AB1220 (Harper R-Huntington Beach), supported by a coalition of residential property owners, would expressly prohibit local governments from levying taxes based on short-term rental income.

 How the Topic Has Been Treated So Far By Local Jurisdictions

At present, the legislative and judicial evaluation of short-term rentals by California jurisdictions is in flux. Only a small number of cities and counties have as yet adopted laws on the subject. Quite a few local governments are still evaluating what to do. That is changing rapidly with more public awareness of the topic, as witnessed by the events this week in Santa Monica. There the unanimous City Council voted, without first taking public comment, to prohibit short-term rentals of entire residential units within its city borders. As far as short-term rental of spare rooms, less than the whole unit, Santa Monica’s approach is to allow same if the owner/host complies with licensing requirements and pays the City’s 14% occupancy tax, the same percentage as required of hotels, inns and the like in that jurisdiction.

Of the other municipalities which have thus far established legal policies concerning short-term rentals, measures adopted have ranged widely in scope. For instance, San Luis Obispo has a Municipal Code which totally bans “Vacation Rentals” within the city limits, but which is vague as to whether this extends to leasing of only a portion of the unit. Anaheim and Malibu recently passed measures legalizing short-term rentals provided that the hosts register and pay taxes like other businesses offering lodging. By contrast, San Diego’s applicable code does not prohibit short-term rentals categorically but rather prescribes that, in certain parts of the town, it is unlawful to lease out a condominium for fewer than seven days (effectively eliminating this type of occupancy for normal two-day weekends as well as extended holiday weekends).

What is the current status of regulation here in the City of Los Angeles? Our Planning Department is presently reconsidering the City’s zoning regulations in light of the proliferation of short-term renting, with written proposals expected to be surfacing in a few months. In the meantime, as specified in a memo on the subject circulated by the Planning Department last year, short-term rentals are zoning violations in many residential areas but may — at least for the time being — be permissible in certain locations which are zoned for high-density, multifamily occupancy. Hoteliers have been lobbying to eliminate any short-term occupancies, whether whole or partial units, or at least to “level the playing field” by proposing transient/occupancy taxes on short-term rentals at rates similar to those charged by hotels and other lodging providers for units having “like amenities.”

Not surprisingly, the City of San Francisco, where Airbnb is based, has had a flurry of activity on this topic too. This is at least in part because of the limited rental housing stock in that municipality as well as the extremely high rental rates for apartment and condo units there. San Francisco’s Administrative Code previously precluded “tourist” or “transient” occupancy, and short-term rentals were considered to fall into those categories. Moreover, the City’s Planning Code may have been a barrier too because it restricted operation of “hotels” in areas zoned for residential, and some groups argued that short-term rentals were covered by the hotel restriction. At this time, a fairly new ordinance in San Francisco provides some exceptions in narrowly limited circumstances. However, the regulations are the object of considerable lobbying, with apartment owners’ groups trying to expand the number of exceptions and tenants’ organizations trying to cut back on those few now available.

 Litigation Concerning Short-Term Rentals

Thus far, most litigation related to short-term rentals has focused on two topics. One is whether condo HOAs can regulate and limit the number of such rentals as well as whether they possess the authority to impose fees on condo owners who are engaging in short-term rental. An appellate court decision in Los Angeles County this March supported the right of HOAs to limit short-term rentals as well as to charge fees, although the amount of the imposed fees could not exceed what its Board of Directors reasonably estimates “in good faith” to be needed to “defray the cost” generated by a short-term rental.

Considerable judicial attention in recent times has focused on online hosting platforms. Some have been initiated by tenant advocacy groups. There was also a case decided at the trial level last month reflecting the competition and bickering among those hosting companies, with Homeaway unsuccessfully challenging the new guidelines in San Francisco as being unfairly favorable to Airbnb.

What Are Some Remaining “Hot” Issues and Unanswered Questions

The explosion in the number of short-term rental operations in recent years has been enormous. It is estimated that Santa Monica alone presently has 1,700 sites. Creative efforts to circumvent the newly enacted rules are being devised. The issues left to be determined are numerous, some being rather complex and others less so. Think about just the small list of topics set out below.

  1. In locations where there is already a shortage of affordable rental properties, what can be done to maintain residential availability for lower and middle class tenants? How can the government keep short-term rentals from gobbling up houses, condos and apartments which would otherwise be available for long-term occupancy?
  2. How can the playing field be made more level to placate hotels and motels, which are losing market share to these short-term rentals, especially when the latter presently do not pay transient or occupancy taxes?
  3. How can local governments generate fees from short-term rentals which will not be the subject of substantial litigation?
  4. What impact does regulation of short-term rentals have on rights of privacy?
  5. What can developers and HOAs specify about short-term rentals when creating and/or operating multifamily residential projects?
  6. What will be the ultimate impact of short-term rentals on traffic, parking, crime and property values in the communities which allow those rentals?
  7. How can local governments effectively enforce their regulations given staff and budget constraints?

Updates

This is definitely a “hot-button” subject in California and some other locations around the country. More is assuredly to come. Stay tuned. The Firm will keep a close watch on developments regarding short-term rentals, and it will inform readers of The Joe Cobert Report of significant matters pertaining to this subject as they materialize.

RESIDENT APARTMENT MANAGERS AND THE NEW LEGISLATION REGARDING “SICK LEAVE”

Many readers of The Joe Cobert Report have already heard or read something about the recent California legislation relating to “sick leave”. That legislation, entitled the “Healthy Workplaces, Healthy Families Act of 2014” (the “Act”), applies to virtually all full-time and part-time employees who work on at least 30 separate days in an employment year and entitles them to one hour of paid “sick leave” for every 30 hours worked.

If you are not yet knowledgeable about all the details of that legislation particularly all the records to be kept and rules to be adhered to, we recommend that you contact one or more of the numerous top-level labor lawyers and/or human resources people in Southern California. They are devoting considerable time these days explaining how the Act impacts various businesses and how labor practices and policy manuals need to be revised in order to comply when July 1 rolls around. Why are we writing about the Act in this newsletter? Because we believe that a certain group of our readers are involved in the apartment sector and need to consider specifically the Act’s effect on employment of resident (that is, on site) managers. If you are involved in this property sector — as an investor, a property owner or an officer or principal of a property management company — you need to read on.    The Act Applies Here To begin with, there is no doubt that all or nearly all on-site managers are employees subject to the protections of the new Act. However, a number of the duties and procedures pertaining to on-site managers of multi-family properties and situations they encounter in performing their work differ from those in many other fields of employment. In particular, resident managers have job functions requiring them to divide their home life and personal time and, unlike others who choose to work at home for convenience, they must be at the premises at various times as part of their jobs. Some Key Issues and Questions To Be Addressed Consider these six items:

  1. When the employee is a resident manager who works largely from home and tells the employer that he or she needs some time to care for a sick parent or child living with the employee, how does one clearly distinguish which hours are “on the clock” and counted toward computation of sick leave and which hours are merely “personal” time? What documentation will be sufficient to address this concern?
  2. What if there are two cohabitants (spouses or otherwise) in an apartment unit who essentially share the on-site management tasks, how do you allocate the hours of employment so as to calculate the entitlement of each to sick leave?
  3. Sick leave payment under the Act is to be paid at the employee’s hourly rate when the leave is taken. For those resident managers who receive total or partial compensation by credit against rent due, will that impact the calculation of hours for which the employee accrues “sick leave”?
  4. Many resident managers are “on call” in the event of emergencies. If the owners continue to have an “on call” policy, will the hours counted for sick leave computation include any of the “on call” time? Will the clock start running at the moment the emergency call comes in or prior thereto when the manager is “available” in case of such a call?
  5. The Act provides that an employee choosing to utilize “sick leave” does not have to pre-arrange the time with the employer (although it is preferred if the employee can provide notice early on). Nor does the employee have to line up a replacement in the event that he or she is going to utilize accrued sick leave. What should owners and property management companies acting on behalf of owners do to be prepared in the event the resident manager takes sick leave with little or no notice? If there is no co-manager, what latitude does the employer possess to cover for the absent manager? Would the situation be different for smaller apartment buildings than for complexes of 16 units or more (as to which California law mandates a resident manager)?
  6. The Act requires the posting of certain notices about the sick leave rules at a “conspicuous place” on the property where the employee works. If there is no separate room on the premises which has been set aside as an office specifically for use by the resident manager of an apartment project, what locations qualify as “conspicuous places” for these purposes? What enforcement is there going to be on this and are there going to be penalties for supposed non-compliance?

Special Suggestions For Apartment House Buyers

As part of their due diligence, investors seeking to buy apartment buildings with on-site management need to verify how much paid sick leave the on-site manager has earned but not used. Pro formas generated by syndicators now will have to take this accrued liability into consideration. Sellers of such complexes now must include this information on their books (as well as in every payroll stub given to the on-site manager with his or her salary check).

Additionally, think about this: Many apartment house buyers want to select their own on-site manager instead of the person the seller was using. Now, in doing this a buyer must inquire when the current manager last took sick leave. Why? Because the Act creates a rebuttable presumption that termination of an on-site manager within 30 days of that manager’s taking sick leave is retaliatory for the taking of such sick leave and therefore constitutes a wrongful termination.

  What Next On This Topic?

In preparation for the July 1 operative date of the Act, lawyers, HR personnel for various affected businesses and apartment associations around the state are scrambling to develop the forms and modify the language of standard employment agreements they have long been using or disseminating to their members or clients.

Joe Cobert has been working on this quite actively. If there are any amendments to the Act or regulations generated by the office of the California Labor Commissioner, Joe intends to obtain copies of same and to keep our readers updated.

We express our thanks to labor lawyer Richard Rosenberg of Ballard Rosenberg Golper & Savitt, LLP for his assistance with this article.