Calif. Real Estate Regulations, Legislation To Watch In 2021

By Andrew McIntyre
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Law360 (January 3, 2021, 12:02 PM EST) -- Efforts to create more affordable housing as well as reform the property tax system are among the areas of real estate legislation and regulation California attorneys will be watching in 2021.

Golden State voters in November rejected a measure that would have created a major change to the state's controversial property tax system, and experts expect to see continued efforts to rewrite the tax code in 2021.

And as the state continues to deal with a housing affordability crisis and faces a potential wave of COVID-19 related evictions early next year, lawyers will also closely watch efforts in Sacramento to create more affordable housing and keep residents in their homes.

Here, Law360 looks at four areas of California real estate legislation and regulation to watch in 2021.

Prop. 13

Since the passage of Prop. 13 in 1978, commercial and residential properties in the state have only been reassessed for tax purposes when they've sold, and lawmakers and special interest groups have been trying to rewrite the law for decades.

Voters in November rejected a so-called split roll change to Prop. 13 by voting down Prop. 15, which would have required most commercial and industrial properties to be taxed on market value rather than purchase price. But experts expect continued efforts in 2021 to change Prop 13.

"The rewrite of California's property tax system failed this year. It's going to come back," said Manuel Fishman, a shareholder at Buchalter PC.  "When there was a wholesale effort targeted at commercial properties, it failed. I do think there will be a continued effort to try to change California's Prop. 13."

Prop. 13 does allow property values to rise by as much as 2% a year, but property residential and commercial values in California over the past four decades have risen by much more than that mark.

And getting voter approval to change Prop. 13 would be challenging, cautioned Lorie Soares Lazarus, a partner at Stroock & Stroock & Lavan LLP. While it's one thing to create more tax burden on commercial properties, millions of homeowners in the Golden State have for decades also benefitted financially from Prop. 13.

"The concern is if you start chipping away at Prop. 13, eventually you get to everybody's house," Lazarus said.

S.B. 1120

California lawmakers were close earlier this year to passing a bill, S.B. 1120, that would have permitted most single-family lots in the state to be partitioned into two units, and experts expect a renewed effort on that front in 2021.

"The one that I think perhaps is most likely for 2021 is S.B. 1120, which was minutes away from passing, literally minutes, in the last session," Lazarus said. "That would have increased the housing supply fairly significantly if even a small number of units or eligible lots took advantage of that."

S.B. 1120 was close to passing in the summer, but lawmakers ran out of time and the bill did not make it to the state Senate for a vote by the deadline of midnight on Aug. 31, the end of the session.

The effort to rezone to allow for duplexes on single-family lots is part of a broader effort on the part of California lawmakers to address the state's housing affordability crisis. Several years ago, the median house price in San Francisco topped $1 million.

Lazarus noted that the League of California Cities Cities, a statewide advocacy group representing most California cities that has opposed most measures that would increase density, did not oppose S.B. 1120, which suggests that idea may still have some traction.

Eviction Moratoriums

While S.B. 1120 and the question of rezoning is one issue when it comes to housing, there's also the concern of whether renters will be able to stay in their homes in early 2021 as the COVID-19 pandemic continues.

Residential landlords find themselves in a tricky place, since they are facing pressure from their lenders to make mortgage payments. While the current moratorium has given renters, landlords and lenders some time to try to work out disputes, it's unclear how these disputes will play out in 2021.

California has followed New York in imposing moratoriums on evictions amid the COVID-19 pandemic, and all eyes are on whether the current moratorium in the Golden State will be extended.

Peter Ballance, a partner at Stroock, said the legislature is going to have to address what could be a massive number of people being forced out of their homes if the moratorium doesn't get extended.

"As we are barreling through the end of 2020 with hopes of a vaccine, and although we expect that to happen, on Jan. 31, these issues are still going to exist," Ballance said. "All of this rent is going to come due."

Surplus Land Act

In late 2019, California Governor Gavin Newsom signed a bill that made changes to the state's Surplus Land Act, and lawyers say the change is likely to result in a flood of litigation in 2021.

The new changes requires local governments looking to sell their land to first offer the land for affordable housing through a formal process. Experts say it's not entirely clear what obligations developers have under the change to the Surplus Land Act and if, for example, offering affordable housing on part of the land might satisfy the Act.

The change requires developers to provide notice of plans to develop land and to give a period of 60 days for parties to voice an interest in developing the land for affordable housing. The governor hoped the bill would kick-start more affordable projects in the state.

Litigation already started in 2020, including an ongoing suit seeking to stop an 11-story, 240-room hotel project in Santa Monica on the grounds that the city and developer Plaza Development did not follow the required procedures under the Surplus Land Act.

And lawyers expect to see more challenges as more parties become aware of their options.

"I am aware of many projects containing hundreds of units — including affordable units — that have been put on hold or will be delayed by a year or more because of the litigation risks created by the revisions and draft guidelines," said Paul Rohrer, deputy chair of real estate at Loeb & Loeb LLP.  "In the coming year, I would expect to see a substantially increased number of litigants challenging projects under the SLA, and, if the draft guidelines are adopted without substantial revisions, legal challenges to the guidelines themselves."

--Additional reporting by Maria Koklanaris. Editing by Alanna Weissman.

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