CEA Legislative Update - March 2024

Michael D. Belote, Esq.
California Advocates, Inc., Sacramento

Housing is Good, But Are Investors Bad?

No one seriously questions the proposition that California suffers from a housing shortage. Governor Newsom promised to create three million housing units in his first term, but for complicated reasons almost certainly beyond his control, only approximately 500,000 units were created in that period. Even with population growth flattening, rent is high, and the state’s median home price exceeds $800,000.

Policymakers are determined to expand the housing supply. The legislature has and continues to consider dozens of proposals relating to CEQA reform, permit streamlining, adaptive reuse, social housing, ADU authorization, tax credits and more to address the problem. While no proposal will fix the issue overnight, over time some combination of these ideas should lead to improvement.

But the legislature also sometimes works at cross-purposes, and housing might be an example. For 2024, a number of bills would very significantly limit the ability of non-natural persons, such as a variety of legal entities, to own and rent, or sometimes even just own, residential real estate. The public policy issue driving these bills is this: the argument is that giant investment entities, such as hedge funds, are buying huge swaths of California residential properties, converting what should be owner-occupied neighborhoods into rental neighborhoods. This is keeping young families and other first-time homeowners out of the market, since they obviously do not have the resources or market power of REITs and similar investment entities.


AB 1333 (Ward): Bundled Sales:
Would prevent developers from selling two or more residences with one to four dwelling units in a single transaction to an institutional investor if the occupancy permit for the units was issued after January 1, 2025. Institutional investors would be defined as an entity which is not a natural person which owns more than 1,000 units. Currently the bill is not clear about whether the units all must be in California, as opposed to anywhere, and what a “single transaction” means.

AB 2584 (Lee) Corporate Ownership:
Would prevent any for-profit entity from obtaining any interest in a single-family residential property and subsequently leasing that property if the entity has an interest in more than 1,000 properties. This bill adds that the state Attorney General may bring an action for violations, and upon prevailing, the court must award damages of $100,000 per violation, plus attorneys' fees and costs. The bill also provides that the entity must sell any properties in violation of the statute within one year from the entry of judgment.

SB 1153 (Hurtado): Agricultural Property:
SB 1153 differs from the other bills because it focuses on agricultural properties rather than residential. The bill is similar in concept to the others, however, because it would prohibit hedge funds and other similar entities from purchasing or acquiring a controlling interest in any agricultural property, as defined in Section 3508 of Title 7 of the United States Code, on and after the effective date of the bill. Because the bill includes an “urgency clause," the prohibition would go into effect immediately upon the Governor’s signature on the bill.

SB 1212 (Skinner): Investment Entities:
Would prohibit an “investment entity," broadly defined to include all REITs and investment pools, from purchasing or acquiring any interest “in housing” in California, unless the entity is a nonprofit, government entity, or company whose principal business is building housing. The bill would absolve a seller of housing from liability under its provisions if the seller obtains written release signed by the buyer that the buyer is not an investment entity.

Obviously, these bills all raise fundamental policy questions about who should own real estate in California, questions on which reasonable minds can and will differ. But equally obviously, each raises untold operational questions. If the threshold is 1,000 units, is that per entity? Can’t someone form multiple LLCs? How will the seller know? What happens to title to these properties acquired in violation of the provisions of three bills? Are loans taken out on the properties void?

Each of the bills must be approved by its initial policy committee in the legislature by a deadline of April 26. Stay tuned!