COVID-19: AB 828 Paul Herrera #692

Aaron and Bruce Norris are joined again this week by Paul Herrera. Paul is the Government Affairs Director for the Inland Valley Association of Realtors. Paul serves as an advocate for realtors on local issues, helping to preserve and protect property rights and the value of homeownership. His unique experience includes an award-winning journalism career with newspapers in Florida and California. He covered real estate, small business, the aviation business, and the confluence of government policy, politics, and business. See below for full video and resources.   

Episode Highlights

• What is AB 828?
• What are some areas of concern?
• What is the current standing on the proposed legislation?
• How would the ecosystem work regarding how the money flows?
• Have any of the national bodies chimed in on this and given their thoughts?
• How would the proposed rulemaking affect lending?
• Where can people go to get more information on this?

Episode Notes

Aaron Norris: Hey everybody, it’s Aaron Norris with the Norris Group, and today we are here with Paul Herrera. He is the head of legislation for the Inland Valley Association of Realtors, among other association realtors in Southern California. And we’re here today to talk specifically about AB 828, making a lot of headlines as the bill that would reduce rents by 25 percent in California, which is a big concern. And Paul, you’re going to have to fill us in on this because this sounds fake.

Paul Herrera: Sure. It is one of the wildest intrusions the legislature has considered, and to any industry, specifically, the rental industry, that I’ve ever seen. And I don’t want to be alarmist about it because it’s actually quite a bit more complicated than just the headline “Twenty-Five Percent Reduction in Rents. I think that argument is too simple for what it actually does. And so whenever you’re ready, I can start going into the details.

Aaron Norris: Yeah, let’s do it. Talk about where this came from. It seems like it came out of the blue. One of the things that’s so frustrating is you’ve got the federal, the state, and then you’ve got all these local municipalities doing their own separate thing, which is really difficult to follow, especially if you’re a landlord that owns properties in multiple areas. You really have to be plugged in at all three of those levels.

Paul Herrera:  Yes, so 828. I want to start with the easy stuff and then come to the twenty-five percent reduction and how complicated that gets. So the easy stuff is AB 828 will introduce a moratorium on any official actions related to foreclosures, tax default sales, and evictions throughout the period of the state of emergency plus 15 days after the emergency ends. On its face, when it comes to evictions, that hardly even matters because the state judicial council last week passed the moratorium not allowing courts to be involved in this for 90 days after the emergency is declared over. So you would think, OK, fifteen days, that would be an improvement from where we are. There’s a very important caveat to that. The Judicial Council order applies to state of California’s emergency declaration. AB 828 would include any emergency declaration that covers the area where the property is located, including the city declaration, the county declarations. So you can imagine a scenario in which maybe the state ends the mercy declaration in May or June. But the city of Los Angeles, Santa Monica, Oakland, whoever just keeps extending that. States of emergencies can last for years. This one would have a final sunset of January 1st of 2022. That’s 19 months from now. So you could have a scenario in which you are not receiving rent and can’t take any action to evict for the next 19 months. You are looking at two years of receiving no rent and not being able to take any action if a city or the state wants to just keep extending the state of emergency. So that’s one area of concern. Does that all make sense? Any questions there?

Aaron Norris: No. I wasn’t gonna immediately ask, you know, whose state of emergency is the most important. And, you know, immediately I’m starting to think about all the different players underneath a landlord that has finance involved. And I think one of the most offensive things that happened this month is watching Newsom announce “Thank you counties for playing ball.” And the county’s press release that they put out basically said “Yeah, your property taxes are still due, but every county may or may not waive late fees because if you stop paying, we’re insolvent. It’s offensive because on the backs of property owners, they’re expecting us to absorb that, and not just us looking down into the trail of property managers and repair people. You’ve got all the lenders involved. I mean, I just don’t understand how they have a leg to stand on when it comes to this.

Paul Herrera: Well, there’s quite a bit of panic taking place right now at a number of levels in trying to figure out just how bad this goes and where the money comes from to fund basic operations of government. So I don’t think it’s that well thought through. You can imagine. There’s so much going on at the moment that people are just trying to get through this week or maybe until the end of the day at times. I mean, the good news about this piece of legislation is that it had gone absolutely nowhere. There are no votes scheduled. It’s not even assigned to a committee. A year ago, this legislation passed the state assembly as a human trafficking bill. It was deleted and rewritten about two weeks ago as a rental bill. So it has to essentially restart the process.

Aaron Norris: How do you compare a human trafficking bill with a real estate bill? Those are so different. So what do they have to do with each other? And how could you just repurpose it?

Paul Herrera: This is just a process. At this stage in the legislative calendar, this is year two of a two-year legislative session. You’re not allowed to introduce a brand new piece of legislation fresh. The only way you can bring new ideas into the discussion is to take an old bill that has moved through the process, delete the language and put a new language. It still has to go back to December. The fact that the path the assembly has named the trafficking bill with the same letters and numbers does not allow it to pass the Senate, so now it has to go back to the assembly to hash out the differences. You certainly can’t write a blank check. So don’t worry if it passes the Senate, the Assembly passes it. No, they have to go back and approve the fact that the bill was changed completely into something new.

Aaron Norris: OK. That’s what I was curious about. So this was the old AB 828. It’s now just all the language is updated to be about this instead of the human. Got it. OK.

Paul Herrera: The key is that there is a vote scheduled. So right now, the California Apartment Association and the California Association of Realtors are asking members to reach out to senators that represent them and urging them to oppose the legislation. At the moment, it’s kind of hard to get the attention of lawmakers on any given piece of legislation because it’s not up for a vote. They’re not preparing to see it in front of them. We’re just giving them a heads up that this might be coming, and no one really knows what the legislative process is going to look like in a couple of weeks. The legislature is way out of whack right now. They don’t have their normal calendar. They’ve already started missing deadlines, and so they have to try to come up with a new calendar. We don’t know if things will move in a couple of weeks where they normally would take a couple of months. We don’t know if this stuff is just gonna get punted to the side while they ham around budget issues, which are huge at this point. We just don’t know. We just want to make sure that the message is loud and clear that we oppose AB 828.

That reduction in rent gets very complicated. So part A was the moratorium. If that passes and that was the only thing that this is about, we’d have a problem because now you have every single jurisdiction in California capable of delaying any action on not paying the tenant for almost two years. The part that’s gotten the most attention is the idea that a judge can impose a 25 percent reduction in the rents on behalf of the tenant, and he essentially rewrites the lease agreement between the tenant and landlord. There is a lot of fine print in this legislation, and I honestly wouldn’t be surprised if tenant groups come out and oppose AB 828.

Here’s how this works. Right now, if you have this issue and you go before the judge, it’s contested and the tenant is there, the end result for the judge is really one of two options. Option A involves your landlord. You filed all the proper process, you’ve demonstrated that they’re not complying with the lease by not paying it or some other violation lease. So, therefore, I am granting the writ of possession. You can take this to the sheriff’s office and you’ll get a lockout. Option B, especially with the just cause eviction laws that passed and were implemented earlier this year, is the judge says your landlord showed you had followed proper procedure and this eviction is not valid. I am ruling that the tenant remains in possession and the lease continues moving forward. This tries to provide for option C. This would be the judge, after determining that the tenant has faced loss of income or increasing expenses as a result of COVID-19, and if they face a loss of income or increase in expenses between March of this year and March of next year, the judges presume that it was caused by COVID-19. Then the judge can impose a twenty-five percent reduction in rents that would last for twelve months.

So let’s give you a scenario because I don’t think the fine print of this is all that friendly to tenants. So let’s just imagine a scenario in which a tenant is paying $2,000 a month for rent, and they lost their income in March. So they paid their March rent on the first, then later in the month they lost their income couldn’t make April or May rent. And let’s also imagine a happy a world in which everything is back and functioning completely normally. On June 1st, diplomacy is over. Even the courts have rescinded their order. And we’re just back to normal and so are checks. So then the landlord tells the tenant, “OK, you owe me $6,000 for April rent, May rent, and June rent. The tenant says they don’t have it, so the landlord says “We’re going to have to begin the eviction process.” The tenant says, “Well, I heard about the 25 percent reduction in rent. I want to try to take advantage of that and request that.” So let’s say the court system is working swiftly, and 45 days later they’re before a judge on July 15th, and the judge agrees with the tenant and says, “Yes, you demonstrated to me your need, your loss of income, and therefore, I’m granting the 25 percent reduction in rent starting August 1st.”

So your new rent is $1,500 instead of $2000 a month through the end of next July. However. The law, as written at the moment, says that they are to add to that rent 10 percent monthly of the outstanding rent balance that existed when the judgment was entered. So at this point, July 15th, that’s $8,000. Two thousand in April, May, June, and now July. So 10 percent of that is $800. So tenant, your new rent starting August 1st is twenty-three hundred dollars, more than what your actual rent would have been. And actually, it’ll be more if you’ve missed at least three months of rent, which is going to be a lot of folks if they truly lost income and the ability pay during this time.

Next question is, OK, well, if they miss a payment in August, I got to start all over again? They’ve gotten a deal and they still can’t pay, and now we’re still looking at a year before I can execute the eviction. Not according to this law. The way this is written, it says that on August 5th, five days after the rent is due on the 1st, at 1:00 a.m., August 6, the landlord sends a note to the tenant saying, I haven’t been paid. I’m giving you 48 hours notice. Here’s my voicemail, text, and e-mail asking you to follow up and check. The morning of August the 8th, the landlord, having not received payment, is able to file an action in court declaring this, the judge enters his order and that you still haven’t been paid and are requesting an immediate issuance of a writ of possession, assuming it goes swiftly and you have the fastest eviction in California in 30 years. In the middle of August, you’re walking over with the sheriff’s office and locking the tenant out. That’s where I think it gets a lot more complicated and why I think tenant groups don’t have an issue with it. Some landlords might say, “You know, I don’t know if that isn’t an option for me if my alternative is they live rent-free for a year during this court moratorium.” Now, the law isn’t quite that clear because while it says that the landlord shall ask for this immediate writ of possession, it does not say that the court shall grant it. It doesn’t say anything about how the court should respond to this request. Clearly, the courts able to.

So one of the concerns is whether there is some level of disingenuous law writing in which this remedy doesn’t actually exist? You know, Lucy, with the football. It’s gonna get pulled away if the landlord. tries to act on it. So those are some of the concerns now that, even if the remedy exists, even if all this is possible, it’s still a terrible law. It’s an arbitrary entry of the court system into the landlord-tenant contract. Not that the judges, legislature, and judicial system haven’t done that on some level, but not like this. The writ request is 25 percent now, which had nothing to do with affordability. There’s nothing that says, well, if you lost 80 percent of your income, you get 25 percent. If you lost 5 percent of your income, you get 5 percent. No, it’s just 25 percent. You know, it’s an arbitrary figure derived from absolutely nothing that we can see. If it’s 25 percent now based on nothing, it could be 30 percent based on nothing. It could be 40 percent based on nothing. It could have other provisions based on absolutely nothing. It is completely silent with regard to any kind of relief that a rental property owner who has obligations, has a mortgage, who has maintenance responsibilities and just general bills to pay as a property owner. It is completely silent as to any relief that is offered to that body. I think it’s very important that we stress to the legislature that landlords are not the end of the money chain. They are a middle entity that receives rents on one side and pays it out in a bill on the other side. That’s something that we really struggled to have policymakers understand.

Aaron Norris: Yeah, I just. It’s just disappointing when I see things like this. I’m not an attorney, so I’m going to be throwing contract law. At a national level when you’re dealing with mortgage lenders, I just don’t understand how any contracts that we’ve signed on the other end, once the money comes to us and all the things that we owe, the county has already said that they’re not going to play ball and allow us to take reductions. Maybe they won’t charge us late fees. But unless you get the entire chain to qualify, this is stupid to me. It’s disappointing. I understand we’re in a crisis mode, but it doesn’t solve a lot of the problems and leaves so much liability.

You and I talked last week about some city having to reverse their stance on it. Was it a moratorium on evictions at the local level because local landlords were threatening to sue? Is that what it was?

Paul Herrera: I believe it was on the rent caps because it would be outside of what the authority actually is.

Aaron Norris: Right. And so the city had to reverse that. I just can’t imagine across the board that lenders are looking at the state of California with googly eyes and in love with us. It’s just if they mess this up, it could impact California for much longer than just this pandemic period of time.

Paul Herrera: I have a concern about that as well. Mortgages that are made on real estate are secured loans. You really have no idea whether these leases, which until recently I thought were contracts that bound the party together. If you remove all that, how do you judge the creditworthiness of the borrower? If they turn out to be unworthy, you’ve been locked out of the court system when it comes time to take possession of the property and sell it and try to recover what you have from the security on this loan.

That’s getting into some pretty tough territory. People have to understand the ecosystem of how money flows on this. You have tenants working their job, making a wage, paying rent to the landlord. The landlord receives it. The landlord pays their bills, including the mortgage to the servicer that they’re paying for. The debt of the property servicer sends that money along to the bondholders who bought the paper and have it in the portfolio. In many cases, the bondholder is not, the monopoly man somewhere swimming in cash. It’s CalPERS. It’s CalSTRS. It’s the pension program with these huge investing instruments that impact a lot of us. When a CalPERS pension fund underperforms, which it’s doing right now, they send a bill to the city, the county or the water agency, whoever it is. They’re covering to make up the difference, which means that there’s no money to pay cops on the street, firefighters, teachers, counselors and the whole thing. You know, we cycle right through the system. It’s not as simple as let the rich not get their money. It’s the pension system that it’s impacted. It’s all of us.

Aaron Norris: Yep. Exactly. That’s why when I see these, it just doesn’t seem like it was well thought out, and there’s just so many hanging chads that haven’t been deal dealt with. I get it. You know, these politicians are trying to get everybody to the table. And I got to think, was justice displayed as a negotiating tool to get everybody to the table? I don’t know. It just doesn’t deal with all the different players that are involved and doesn’t seem sincere.

Paul Herrera: Yeah, I think they’re sincerely trying to help. I think they’re also sincerely stepping into something far more painful. They’re signing up for a lot of pain for not a lot of benefit, especially given that the way it’s currently written and destabilizing the way housing finance on investment housing works.

Aaron Norris: Have any of their national bodies chimed in on this, whether it be the National Association of Realtors or the Mortgage Bankers Association? Have they said anything?

Paul Herrera: I haven’t seen national bodies get involved. Now, the National Association of Realtors does not weigh-in ahead of the California Association of Realtors. They let the states handle their issues. Now, mortgage brokers, I could imagine a world in which they look at California’s stance as well as the banks that back the bondholders, and they have in the past. They weighed in on PACE years ago and said, if you’re gonna do this, we’re not going to back the mortgages and allow you to put new mortgages on those properties that have PACEd that. Now, the proposed rulemaking would reduce lending availability for any jurisdiction that has PACE available. So they are willing to weigh in. That’s FHFA, which is Fannie Mae and Freddie Mac, that’s FHA, that’s VA, and that’s a bunch of other organizations that produce a lot of lending in the state. Again, this is very, very early in the life of this legislation when it hasn’t gone to hearing number one.

Aaron Norris: Where’s your favorite place to go right now for information on this?

Paul Herrera: You know, as far as California goes, CAR is maintaining a fantastic resource of information. Usually their stuff is behind a membership wall, but they have a Web site carcovidupdates.org that is keeping this information available to anyone who wants to see it. There are webinars on there. They have an FAQ They update every few days on tenant issues. They have AB 828 information, so I’d recommend that. The California Apartment Association also has really good sources right now, including some of the letters written on the subject. And that’s also outside of their normal membership area. So I think the trade organizations are doing a good job of getting information out there, whether they’re realtors or other members.

Aaron Norris: Yeah. No. Things are just moving quickly and it’s just hard to believe. Everybody is locked in a room, and you forget what’s happening. But yeah, CAR has been that great resource. That’s carcovidupdates.org and then caanet.org. That’s been a good resource and there’s a way to urge a vote no on the California Apartment Association. It has some easy links so you can send your local senator or state assembly person a message that you oppose the bill. It makes it really easy with links on that page. So anything else that we should know about?

Paul Herrera: CAR said the same thing to its members today, so if someone listening to this as a member of CAR, please check your email. It’s a couple clicks and you send a note to your senator. Again, it’s not going to a vote right now, but we want to make sure it’s on their radar and our arguments are heard before it gets too much momentum.

Aaron Norris: Yeah. Just for landlords, you know, just because you’re not currently impacted doesn’t mean that you won’t be. So please just get very organized and prepared. Some of these bills coming out are going to make you show demonstration that there’s an economic hardship happening. But it doesn’t mean that if you can’t get proof from a tenant to get them pro-active showing you that you are going to be taking a hit, that maybe you can’t get in line for things like the payment protection program or the EIDL program. So just stay engaged. Get very organized. Document everything to be prepared either way, and stay engaged. I think these associations have done a really good job. And then at your local level, you know, you’ve got the local associations sending out a lot of information. But if you’re out of county and you’re not members of those associations, hopefully you have a realtor that’s keeping you up to date because it can really change by the county and the city level. So is there any other thing that you’ve seen that you’re worried about in the legislative space at the local and state level?

Paul Herrera: Well, I’m terrified of what the final economic impact is going to be to all government budgets. I don’t know where that’s going to go or what the secondary impacts are going to be. You mentioned earlier that the counties and the state aren’t giving any breaks when it comes to property taxes because they need to fund operations. What happens when they have deficits and they need to find revenue from somewhere? Are we going to look at proposals with tax increases? No, I don’t think that the voters are gonna be receptive to that sort of thing. But is the push going to be there? I think there’s going to be some recommendations along those lines, You’re getting into a scenario here where people don’t have income, but they’re being asked to part with more of it.

Aaron Norris: It’s just frustrating when you’ve got the state governments and the federal government asking for those kinds of cuts on the backs of, you know, this is not anybody’s fault. But unless you deal with it systematically, we’re all parties involved and we’re very organized. I really wish, if nothing else, that the state would stop allowing the local jurisdictions to, I mean, it’s almost making it worse and they’re not coordinated. And how are you going to coordinate when the localities are doing different things, especially if it impacts contracts that are not California specific. I mean, it’s just nuts.

Well, I really appreciate your time coming on and trying to keep us up to date on this. We’re recording this, let’s see, I’m in Florida, it’s 6 p.m., April 23rd, my time, 3:00 p.m. Eastern Standard Time. So tomorrow when we post this up, things could absolutely change. We’re doing our best to keep everybody up to date. But those local resources are going to probably be your main source. So anything else, Paul?

Paul Herrera: Nothing, I think that’s it. By the way, if anybody out there ever has a question, I’m always available. I like taking calls, hearing what’s going on, and being able to answer questions if that comes up. Feel free to hand them my e-mail address.

Aaron Norris: I don’t know if you want that out in the net sphere, but you know what. I’ll allow them to connect with you on LinkedIn. How about that? Paul Herrera. And they can hunt you down. Thanks for coming on and always being willing to participate in these. It’s been really helpful.

Paul Herrera: Sure, you got it Aaron.

The Norris Group originates and services loans in California and Florida under California DRE License 01219911, Florida Mortgage Lender License 1577, and NMLS License 1623669.  For more information on hard money lending, go www.thenorrisgroup.com and click the Hard Money tab.

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