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2004 Legislation Year End Summary

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We had a great 2003 - 2004 Legislative Session! We killed every bill we opposed. The only bills that passed were neutralized through careful negotiations. At this point, we are awaiting final action from the Governor on several bills. We anticipate that he will sign the remaining legislation and that most of the bills that we negotiated will be chaptered into law and take effect on January 1, 2005.

We continue to build a very strong reputation in the Capitol on housing policy. When major policy initiatives are considered, we are amongst the first to be called by Members of the Legislature, the Administration, committee consultants, legislative staffers, and our supporters and opponents. This is direct evidence that we are considered extremely strong on housing policy formation and very effective in communicating our positions on issues of importance.

Here is the year-end roundup as of September 20, 2004. For more information and direct links to each bill please visit www.themcconnellgroup.com and click on 2004 Legislation:
AB 1426 (Steinberg) Affordable Housing: Greater Sacramento Passed
AB 1850 (Cohn) Property Taxation: business records retention Dead
AB 2088 (Dutra) Residential real property: Costa Hawkins Inactive
AB 2348 (Mullin) Housing element: regional housing needs Passed
AB 2148 (Lowenthal) Housing Elements Passed
AB 2175 (Canciamilla) Conversion of Rental Housing Dead
AB 2194 (Cogdill) Prevailing wages: determinations: task force Dead
AB 2400 (Keene) Controlled Substances Meth Laboratories Dead
AB 2523 (Frommer) Controlled Substances - Unlawful Detainer Passed
AB 2582 (Lieber) Tenancy: environmental hazards Dead
AB 2583 (Lieber) Tenancy: personal information Dead
AB 2980 (Salinas) Housing element: self-certification Dead
SB 115 (Torlakson) Landlord Tenants - Payments Chaptered
SB 17 (Escutia) Property Taxation - Change Of Ownership Dead
SB 1145 (Burton) Tenancy Chaptered
SB 1404 (Soto) Multifamily improvement districts Passed
SB 1508 (Ducheny) Loans: restrictions: code violations Passed
SB 1609 (Dunn) Housing development projects: local agencies Dead
SB 1634 (Alarcon) Substandard conditions Dead
SB 1722 (Ducheny) Proposition 65: enforcement: judgments Dead

Next month, we will know every new law that will take effect. We will provide analysis in November and December articles on what changes need to be made in operations to ensure compliance with new laws.

TURNING OUR ATTENTION TO 2005-2006 LEGISLATIVE SESSION
It is now time to start considering our 2005 - 06 agenda. The good news is that I have had numerous discussions with Administration officials including Sunne McPeak, Secretary of Business, Transportation and Housing, and have been assured that the Governor will have a forceful housing production and pro-business agenda. We are very well positioned to be at the center of those efforts.

In addition, we have a new President of the Senate, Don Perata from Oakland. While he represents Oakland, which has rent control, Senator Perata is considered much more business friendly than his predecessor, John Burton, and his district is not nearly as anti-owner as San Francisco. We think we have a good shot at persuading Mr. Perata to moderate the overly pro-tenant approach used by Mr. Burton.

To be sure, we will have challenges next year. I have been informed that the tenant lobby will reintroduce legislation to require a 60-day notice of termination of tenancies and a host of other regulatory provisions. As well, an unrelenting core group of legislators will continue their constant legislative assaults that promote "social justice" at the expense of property owners. We will work with all members of the legislature to advance housing in California, but we will also make it clear that we will fight attempts to take away our members' rights.

As we get ready for next year, I have asked each association to convene its legislative committee to look into some of the most pressing problems and consider what a proactive agenda might look like. The only caveat is that while we are very strong on defense, we continue to face hostile "progressive" committees that will try to thwart major offensive reform.

I have also been considering new approaches that we may use to communicate more effectively next session. In addition to regular updates, Sacramento Reports, red alerts, and my website, I plan to hold monthly conference calls for McConnell Group Clients. This will give me a greater opportunity to get input and guidance on issues in a timely manner and ensure that all of the associations that I represent are in sync on strategies and tactics.

I encourage readers of this column to consider active involvement in your association if you have issues that you would like us to address. I also would like feedback from you on ways that I may provide better service to you. Please send me your thoughts.

ADDRESSING THE REPLACEMENT ROOMMATE ISSUE

I will be hosting meetings in October with owner and Realtor( groups in San Francisco, Los Angeles and other groups around the state to consider ways to address the replacement roommate issue that was the focus of AB 2088. I will update you on those efforts. For the time being, new lease provisions to use to protect your right to increase the rent when all original tenants no longer occupy the property are under review. Please contact your association for details.

In closing, it continues to be my privilege and honor to represent you in Sacramento. I hope to continue as your advocate for many years to come. We have enjoyed much success, but we can never become complacent. Let us continue to look for better ways to advance and protect the vital interests of housing providers in California.

Greg McConnell heads The McConnell Group, a California Advocacy and Consulting firm. The McConnell Group represents and advises apartment associations, property management companies, and individual owners throughout California.
For more information please visit www.themcconnellgroup.com.
( This article is copyrighted and cannot be republished without the consent of the author.)
1 (California Association of Realtors puts that number at 75% of the population)

The Split Roll Tax

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It amuses me to hear the debate about the appropriate name for people who rent residential units. On one end of the spectrum is the term "landlord" which some of the more hostile tenant activists equate to "greedy bloodsucker." The moniker used at the other end of the spectrum is "housing provider", a.k.a., "benevolent benefactor sent from high above."

The truth is that rental property owners are neither devils nor angels. They are business people who sell a product.

The commercial or business nature of landlords/housing providers will be put on full display this fall. In November, California voters will decide the Split Roll Tax Initiative that is being circulated by the California Teachers Association and universally regarded as a shoe-in to make the ballot.

SPLIT ROLL TAX - A BRIEF DESCRIPTION

The Split Roll Tax Initiative is a proposed constitutional amendment sponsored by the California Teachers Association (CTA) and Robert Reiner. It would scuttle the tax protection provisions of Proposition 13 and significantly increase taxes for all commercial property, including residential rental property valued over $700,000.

The initiative defines commercial residential property as "that portion of a building that contains one or more dwelling units that are not owner occupied." As to such property, it maintains the current property tax and imposes an additional ad valorem property tax on the assessed value of the property. The rate increases with the assessed valuation of the property from a rate of .10 ($700,000-$799,999) to .55 ($1,000,000 or more).

According to CTA, this measure is necessary to raise revenues for a new pre-school program and K-12 education, including teacher salaries. One third of the revenues are dedicated to the pre-school program. The remaining two-thirds goes to K-12 education.

HOW SPLIT ROLL AFFECTS APARTMENT OWNERS

Taxes will increase on residential rental properties that have assessed values of more than $700,000. This includes rented single-family homes and condominiums.

For properties assessed at $700,000, the increase will be an additional $700 per year. For properties with an assessed value of $1 million or more, the tax burden will increase by an additional $5,500 for every million dollars of assessed value.

For properties currently assessed below the $700,000 threshold, the major impact will be felt at point of sale. That is when properties will be reassessed and buyers who face new tax loads will undoubtedly try to reflect their added burdens in their offers.

Owners in rent control cities would have a really big problem. They cannot pass the cost of new taxes through to sitting tenants unless the local rent control law allows a pass through. Berkeley owners, for example, would have to absorb the costs for sitting tenants. Nor can rent controlled owners pass through increased costs under vacancy decontrol. Those units are already renting at market prices and, try as one might, owners cannot charge rents that are higher than market.

Owners in non-rent controlled cities will be able to pass some of their costs through to tenants who have long tenancies and pay below market rents.

SPLIT ROLL'S IMPACT ON TENANTS

The proponents of the measure argue that it is necessary to increase funding for pre-schools and teachers. What they don't tell voters is who pays for the tax. In the case of apartment tax increases, that would be, among others, the pre-school operators, teachers, and other long-term apartment residents who rent below market and cannot afford to buy California's medium priced $400,000 plus homes. 1

Unlike owners who may be able to take tax deductions on some of the loss, the tenant who pays for the increase just eats it. And it is a big bite. On a hypothetical eight-unit building valued at $1 million, the tax increase under the CTA Split Roll Initiative would be $5,500 per year. That translates into rent increases of approximately $57 per month and would necessitate a 5.7% increase on an average asking rent of $1,000 per month. This number will be compounded annually.

Teachers and pre-school operators who are long-term tenants with below market rents and who rank amongst the 75% of California residents who cannot afford to purchase a home will be hurt badly by this measure. I wonder if CTA and Rob Reiner thought this through? They raise taxes on the very people they say they want to help. Is this the kind of thinking that led Archie Bunker to call him "Meathead"?

I am sure that many people want to improve our schools. And, in fact, some readers of this column may think that raising taxes is morally the right thing to do. But, if that is the case, why did CTA and Rob Reiner not include new taxes for homeowners in the initiative? Don't homeowners who have kids in school benefit from the measure? The answer is simple. The proponents didn't include homeowners because they know that homeowners would vote the measure down.

Bottom line, this is just another deal that tries to pass things on to business people. If it succeeds, it will be another nail in the coffin of what was once a thriving and prominent state.

DEFEATING THE SPLIT ROLL TAX INTIATIVE

Over the next several months, we will report more about the CTA Split Roll Tax Initiative and efforts to defeat it and protect owners from its impact. Suffice it to say that this will be a huge battle that will unify California businesses in unprecedented ways. California apartment owners represented by The McConnell Group will play a significant role.

For now, you can view the full text of the measure on the Attorney General's website.

Greg McConnell heads The McConnell Group, a California Advocacy and Consulting firm. The McConnell Group represents and advises apartment associations, property management companies, and individual owners throughout California.
For more information please visit www.themcconnellgroup.com.
( This article is copyrighted and cannot be republished without the consent of the author.)
1 (California Association of Realtors puts that number at 75% of the population)

What Lies Ahead?

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Think 2003 was a crazy political year? Take a look at some of what we have ahead of us in 2004.

Governor Schwarzenegger is aggressively promoting a March 2nd, $15 Billion Bond to finance the state's humongous budget shortfall. Others are sponsoring Proposition 56, the so-called Budget Accountability Act, which would reduce the voting requirement to increase taxes from the present two-thirds vote to a majority vote of only 55 percent of the Legislature. The California Teachers Association is circulating an initiative for the November ballot that will increase the tax on residential rental income property that has an assessed value in excess of $700,000.

Meanwhile, we have the Democratic Primary with upsets in Iowa by John Kerry and John Edwards and the spectacle of Howard Dean's now infamous Iowa yell, "Yeahhaaaaaaaaaaaaa," on the night that he got whipped so badly. On the Republican side, President Bush is touting his tax cuts and strong leadership in the war on terror.

No doubt, California's fiscal crisis combined with a presidential election year sets up a very volatile political season. Here are a few thoughts that I would like to share with you about some of the upcoming fiscal campaigns.


The Schwarzenegger Campaign

In a series of campaign stops around the state, Governor Schwarzenegger proclaimed that if the March 2nd, $15 Billion Bond is not approved, California faces "Armageddon" cuts in programs and services. Democratic State Controller, Steve Westly, who serves as co-chair of the campaign to pass the Bond, said that the March 2nd vote is probably the most important vote Californians have ever been asked to make.

Opponents of the measure think cuts are good. They ask, "Why is it that California has a population that is twice the size of Florida yet a budget that is three times larger? Whatever happened to economies of scale?"

In response, proponents counter that the state will be unable to get its finances in order if voters reject the $15 Billion Bond. This will further erode confidence in California and hasten the exodus of business out of the state, taking with it tax revenues, jobs, etc., etc. In the end, California's fiscal crisis will only get worse.

As with all things political, the truth probably lies somewhere in the middle of the two arguments. While this column has been very high on the changes that the Governor has brought to California, at this writing we cannot recommend a position. But we urge all property owners to carefully follow the issue and vote their conscience.


The So-Called Budget Accountability Act

This measure is supposed to end political gridlock by reducing the voting requirement for new taxes to 55%. The problem, proponents argue, is that the current requirement of a two-thirds vote is too difficult to achieve and allows a tyrannical minority of fiscally conservative Republicans to hold up the budget.

Opponents say hold on. This is not about accountability. This is a "Blank Check Initiative." If it is passed, the Democratic majority in the Legislature will be able to pass tax increases with little or no accountability to anyone.

Opponents also point out that attributing the motive of accountability to this initiative is deceptive. The initiative provides that, until a budget is passed, legislators will have their pay withheld. However, legislators will be paid retroactively as soon as the budget is approved. So, as Trevor Grimm of California Apartment Law Information Foundation asks, "where is the punishment?" And, if there is no real disincentive, where does the accountability come in?

Another significant problem with this initiative is that the Legislature, in an unholy alliance of Democrats and Republicans, created electoral districts that almost guarantee reelection of incumbents and their party followers. This means that until some major shakeup occurs, the Legislature will continue to be dominated by one party - Democrats.

I don't know about you, but I prefer a two-thirds vote requirement for new taxes. I like the idea that our Legislature has to work long and hard to come up with a compromise. In this situation, all gridlock isn't bad gridlock. At the Board of Directors meeting in January, a unanimous vote was cast for the Apartment Association, California Southern Cities to take a "No on 56" position.


The California Teachers Initiative

We will have a lot more to say about this initiative in the coming months. (See Nancy Ahlswede's Political Perspective column in December and January.) For now, remember this, the California Teachers Association (CTA) had a choice between two initiatives that were approved for circulation. One excluded residential rental property. The one they chose to circulate includes your property.

CTA made a calculated decision that a lot more money would be available to teachers if rental property taxes were increased. But, I wonder if they fully considered that their decision promotes the possible development of a major alliance between owners and tenants against the initiative? After all, if the initiative is passed, property taxes will increase significantly and so too will rents!

Greg McConnell is a rental housing consultant and your association's legislative advocate. He represents and advises apartment associations, property management companies, and individual owners throughout California. For more information please visit www.themcconnellgroup.com

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( This article is copyrighted and cannot be republished without the consent of the author.

New Laws for 2004

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Happy New Year! As we have reported previously, several new laws take effect on January 1, 2004.1

Three new laws that are most important and warrant your close attention concern security deposits, habitability, and contracts in foreign languages.

SB 90 (Torlakson) amends Section 1950.5 of the California Civil Code, relating to security deposits. The law continues to require owners to provide accountings on deductions from security deposits within 21 days of the tenant's departure from the unit. Additional key changes are:
* Owners must provide receipts to prove the cost of deductions.
* Owners can make good faith estimates of costs when work reasonably cannot be completed and paid for within 21 days. Receipts must be given within 14 days after the owner receives them.
* Owners can deduct for in house or self-labor, but they must make an accounting of time spent and amounts charged.
* No receipts are required if the total deduction is in the amount of $125 or less. However, after receiving the accounting, a tenant may request receipts.
* A tenant may waive the right to receipts.
* Owners and management companies that buy in bulk and use in house labor may prove the cost of bulk purchases in a reasonable way.
* Accountings of security deposits and refunds are to be mailed to the tenant at the tenant's forwarding address if it has been provided to the owner. If not, the owner must send the itemization addressed to the tenant at the unit that the tenant has departed.

AB 647 (Nunez) amends Section 1942.4 of the California Civil Code and Section 1174.21 of the Code of Civil Procedure, relating to habitability and attorneys fees. This law addresses situations where the landlord fails to timely repair serious violations of the health and safety code.

* Owners may not demand, accept, or increase rent, or serve a three-day notice when all of the following conditions exist prior to the landlord's demand or notice:

1. A housing inspector, after inspecting the property has determined that the premises are in violation of Sections 1941 and 17920.10 and .3 of the Health and Safety Code2

2. The owner has been served notice that the defective conditions exist

3. The owner has not abated the conditions within 35 days, except for good cause, and

4. The tenant has not caused, by an act or omission, the defective conditions or prevented repairs.

If the owner attempts to evict a tenant when all of the above listed conditions exist prior to issuance of a three-day notice and unlawful detainer, a court may award attorneys fees, in an amount to be determined by the Court, to the prevailing tenant.

AB 309 (Chu) amends Section 1632 of the California Civil Code, relating to contracts in foreign languages. It provides:
* An owner who negotiates a lease/rental agreement primarily in Spanish, Chinese, Tagalog, Vietnamese, or Korean, must provide a contract (lease/rental agreement) translated in that language.
Owners who are unable to provide contracts in foreign languages should not negotiate in foreign languages.


Association Sponsored Legislation

The association is sponsoring legislation to address a threat to vacancy decontrol. It has recently come to our attention that some rent control jurisdictions are applying a new test for when owners may increase the rent when original tenants depart and replacement tenants are allowed into the unit. Essentially, they are requiring the owner to show that the departing tenant has sublet or assigned the unit to the new tenant. If not, the owner may not increase the rent despite the fact that all of the original tenants have departed.

The requirements create two types of problems. If the unit is sublet, the original tenant retains the right to reenter the unit and may not have permanently ceased occupancy of the unit. This can be interpreted to mean that a vacancy has not occurred under the Costa Hawkins vacancy decontrol law.

Also, when a tenant vacates, the tenant has no interest in assigning rights to a new tenant. Frequently, the departing tenant and the new tenant are strangers to one another. Imposing an assignment requirement is very difficult.
The effect of these requirements is to allow tenants to hand units down from one to another without the owner ever having the right to make rent adjustments. The Costa Hawkins Act clearly did not intend this result.

The association has instructed us to look into legislation to fix these problems. We plan to make it clear that whenever the original occupants depart, the owner may adjust the rent to new tenants and to tenants who continue to occupy the property (i.e. replacement tenants who took occupancy after the original tenants took occupancy).

We will provide more information on this and other new legislation in the coming months. For more detail on these and other laws being considered, please visit www.themcconnellgroup.com.

( This article is copyrighted and cannot be republished without the consent of the author.

1 Please see October and November Sacramento Reports
2 (These are serious violations that exist to an extent that endangers the life, limb, health, property, safety, or welfare of the public or the occupants of the dwelling. See Section 1942.4 (1))

Spinning Straw into Gold

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This was the most difficult legislative year we have ever faced. A small sampling of what we faced includes: potential statewide rent control (AB 1256); mandatory inclusionary zoning on new and rehabilitated units (SB 178); criminal penalties against owners who assert their rights (AB 1059); shorter periods to process security deposits or lose the right to deduct for repairs (SB 90); loss of the right to collect rent based upon minor housing code violations (AB 647); smoking laws that would turn owners into tobacco cops (AB 210); and legislation that would have made it impossible to screen tenants who had been evicted from other units and would have allowed tenants to pay rent even after failing to comply with a three day notice all the way up to the point of judgment (SB 345). To make matters worse, we were confronted by a very liberal Legislature and recall politics that caused the Governor to shift to the left, leaving us with very little hope that bad bills would be vetoed.

Had these bills passed as they were introduced, the impact on owners would have been measurable in the loss of hundreds of millions of dollars.

We are pleased to report that we came out of the year in very good shape. Every bill we faced was negotiated to our satisfaction. Given what could have happened, this year, we spun straw into gold. (See Legislative Reports in the magazine for more detail.)

LOOKING FORWARD TO 2004

As we enter into 2004, we now have an ally in the Governor’s office. Arnold Schwarzenegger has pledged to make California business friendly and we intend to make sure that he knows that operating rental property is one of California’s most important businesses. But, it would be a huge mistake to rely on this alone. We still face strong threats from the liberal elements in the Assembly and Senate that seek to promote social justice at the expense of property owners.

Several legislators still want rent and eviction control all over the state. They still want to transfer equity from you to tenants and if they cannot get it directly, they will subject you to death by a thousand regulatory bites.

As we have stated many times in the past, owner participation in the association is crucial to our success. We cannot protect your interests unless we have your full support. That includes your membership and your active participation in writing emails, red alerts, and being the front line troops that help us tell the real story of what it takes to provide housing to California’s tenants.

With your help,we can continue to beat them back. Let’s move the agenda back to the middle and make this a truly housing friendly state.

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