Category Archives: Real Estate

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!

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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.