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Author: Staff

Investing in real estate in California, or anywhere, really, is risky, with potential liabilities extending beyond sunken costs. A business entity, such as a corporation or a limited liability company (LLC), can protect investors from liabilities associated with their investment. They can also protect the investment properties from unrelated issues in an investor’s personal life. A California real estate investor does not need to form a business entity in order to make an investment, but it can be useful. Understanding how, and when, forming a business can help is an important part of planning an investment.

Limited Liability of Investors

One of the primary purposes of business entities like corporations is the protection they offer owners against liability for business debts. It is such a central feature that it is part of the name of business forms like the LLC. An individual engaged in a business activity on their own, including real estate investment, is known as a sole proprietor. A group of individuals doing business together form a general partnership by default. In either case, the individuals are liable for any debts or other obligations arising from their business activities. Partners in a general partnership are jointly and severally liable for one another’s business activities.

California law governs the formation and operation of business entities within the state, and determines their limitations on liability. Shareholders in corporations, members of LLC’s, limited partners in limited partnerships, and owners of other business entities are not individually liable for anything arising from ordinary business activities undertaken through the business entity. This requires a strict separation of personal and business assets and activities. For example, if an investor sets up an LLC to manage their real estate investments, the LLC should have a separate bank account.

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Apartment-Building-300x199

Author: Staff

An apartment building can be a great investment for a California real estate investor, but it often requires a great deal of maintenance and attention. California law sets numerous standards and requirements for leased residential premises, particularly when a property includes multiple residences. These include ongoing responsibilities for maintenance and management of the property. Rather than duties owed to individual tenants, these are duties owed to all tenants as a group. Here, we offer a general overview for apartment building owners in California.

Minimum Standard of Habitability

A California landlord is bound by the implied warranty of habitability, which holds that a landlord, merely by offering an apartment for lease, is warranting that it is suitable for residential use. California law defines this duty in very general terms, requiring a landlord to “repair all deteriorations…occasioned by his want of ordinary care,” and to “put it into a condition fit for such occupation, and repair all subsequent dilapidations thereof.”

This implied warranty also means ensuring that the premises meet legal requirements under local building codes, state and federal laws regarding accessibility, and laws involving hazardous substances like lead paint. If a landlord fails to meet their obligations under this warranty, a tenant can get out of a lease by claiming constructive eviction.

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Author: Luke Wake

Luke Wake is an attorney for the National Federation of Independent Business Small Business Legal Center—a Bona Law client. Luke and Jarod Bona have also published two law review articles together, on both takings and antitrust law. Luke is one of this nation’s leading experts on takings law. You can read some of his academic articles here.

The U.S. Supreme Court recently issued an important decision for property owners across the country. Chief Justice Roberts wrote the opinion in Knick v. Township of Scott, which held that landowners are entitled to pursue just compensation in federal court when local or state law has effected a taking of private property. This is major development because takings cases were previously relegated to state courts where judges are sometimes viewed as hostile toward claims seeking compensation over local land use laws.

Knick explicitly overturned Williamson County Regional Planning Board v. Hamilton Bank from 1985. In Williamson County the Supreme Court ruled that one cannot bring a takings claim in federal court until after litigating in state court. But Williamson County was a trap for landowners because, in reality, there is no path to federal court after you have litigated a case in state court. Well established doctrines prevent a litigant from re-litigating issues that have already been decided. The Supreme Court ultimately made this clear in San Remo Hotel v. City and County of San Francisco, where the Court held that there was no way to preserve a federal takings claim if an owner seeks just compensation in state court.

Of course, landowners have always been allowed to pursue just compensation against the federal government for a taking. Those claims must generally be brought in the Court of Federal Claims in Washington D.C. But for claims seeking compensation against state or local restrictions, litigants were stuck in state court. And worse, some government defendants had played games with Williamson County—seeking to remove cases filed in state court to a federal forum, and then seeking dismissal on the ground that the claim had not been litigating in state court. Not all courts allowed those sort of shenanigans, but some did.

In overturning Williamson County, the Knick decision has made clear that property owners may vindicate their federal rights in federal court. That was already true with regard to every other federal claim one might have had against state or local actors. Enacted in the 19th Century by the Reconstruction Congress, U.S.C. Section 1983 has long provided that litigants may sue for a violation of federal rights in federal court. Moreover, if a litigant is successful in litigating a 1983 claim, they are entitled to attorney’s fees—which makes it easier for citizens to hold government accountable.

But Williamson County had assumed that special rules precluded takings claimants from proceeding under Section 1983. The Takings Clause prohibits the taking of private property without payment of just compensation; however, Williamson County concluded that this should be understood as requiring a litigant to pursue compensation in state court in order to have a ripened claim. Yet as groups like Cato Institute and National Federation of Independent Business Small Business Legal Center argued as amicus curiae before the U.S. Supreme Court in Knick, this sort of logic is perverse because it would also preclude litigants from vindicating other constitutional rights. The Supreme Court would never require a litigant to sue in state court in order to ripen a claim alleging that local or state actors had violated the Equal Protection Clause or the First Amendment. So why was the Takings Clause singled-out for special ripening rules?

Ultimately, Chief Justice Roberts concluded that the Court was confused in Williamson County because there really was no good reason for the “state litigation rule.” The constitutional text provides a straightforward guarantee against uncompensated takings—meaning that a litigant is entitled to pursue just compensation in court (either federal or state) if there is no administrative procedure for obtaining compensation owed. So, for example, if a local ordinance precludes all development opportunity without authorizing payment to affected owners, an owner is allowed to proceed in federal court.

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Real estate syndicates allow California real estate investors to pool funds to finance a project. This could be a new development or the refurbishing of an existing property. The person responsible for managing the project, and the investors’ money, is known as the syndicator. A syndicate may arise out of a group of investors looking for a project, or it may result from a developer seeking financing for a project from sources other than a bank. Before investing in a syndicate, investors should understand several important features.

What Is a Real Estate Syndicate?

A “real estate syndicate” is a business entity created to manage a property or project, and which seeks financing through investors. Several different business forms may be used for syndicates, such as a limited partnership (LP) or limited liability company (LLC), to protect investors against liability beyond the amount of their investment. Depending on the type of entity, the syndicator might be liable for the syndicate’s debts and other obligations.

A real estate syndicate differs from a real estate investment trust (REIT) in at least two important ways:
1. REITs typically manage large portfolios of properties, with the goal being longer-term holdings. A syndicate, on the other hand, might exist for the sole purpose of developing or improving a single property, with the intention of dissolving once the project is complete.
2. Investors can buy into an existing REIT and sell their shares without restriction. They tend to be more liquid. Syndicates may only allow investors to buy in at specific times.
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Author: Staff

Most real estate purchases require some form of financing. Banks that issue loans for the purchase of real estate protect their investments in several important ways. The most well-known is the deed of trust, by which the borrower conveys a security interest in the property to the lender. If the borrower defaults on loan payments, the deed of trust gives the lender the right to foreclose on the property. Most deeds of trust contain a “due on sale” clause, which is another way banks protect their interests. This clause limits a property owner’s ability to transfer title to their property. It is worth noting that enforcement of due-on-sale clauses is fairly rare, but it is still an important issue for California real estate investors to understand.property management

Due-on-Sale Clauses

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Author: Staff

Creating a “living trust,” as opposed to a will, allows an individual to take a more active role in the preparation of their estate. In a will, the testator designates someone to act as executor, but that person is not authorized to act until after the testator’s death. The executor must submit the will to a probate court, which can take time. A living will allows the process of distributing assets to begin while the testator—known as the “grantor” of the trust—is still alive. The trustee can bypass the probate process when the time comes. California real estate investors may benefit from living trusts. They should understand the various legal pitfalls that they can produce.

Fiduciary Duties of a Trustee

When the grantor of a living trust is still alive, they often serve as the trustee. The trust instrument should designate a successor trustee to take over upon the grantor’s death. The trustee owes fiduciary duties to the beneficiaries, and could be held liable for breaching those duties. Beneficiaries are only entitled to equitable remedies under California law, such as compelling certain actions or removing the trustee.

If the trust is a “revocable living trust,” the grantor may change the terms of the trust, or revoke it entirely. The successor trustee likely will not have that authority. The legal pitfalls for a trustee of a living trust derive from their fiduciary and statutory duties to the beneficiaries.
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Trustee-that-needs-to-sell-house-300x225

Author: Staff

Creating an estate plan allows a person to direct the distribution of their assets after their death. A will is perhaps the fundamental estate planning document, but it is far from the only way to distribute one’s assets. Creating a “living trust” allows a person to begin the distribution process while they are still alive. The person designated to administer the trust is known as the “trustee.” Living trusts might not be right for everyone’s estate plan, but California real estate investors should carefully consider them. They should also consider who can meet the legal standards for a trustee with regard to selling real property assets.

What Is a Trust?

The term “trust” can refer to a legal document and the entity created by that document. A trust document bears some similarities to a will. When a person dies, their assets become part of a legal entity known as their “estate.” A trust instrument also creates a legal entity, known as a trust.

A trust designates beneficiaries who are entitled to receive something from the assets held by the trust. This could be ongoing income from interest or rent, or proceeds from the sale of trust assets. The person who creates a trust, known as the “trustor” or “settlor,” must designate a trustee in the trust document. In a living trust, the trustor may designate themselves as trustee, but they must also designate a “successor trustee” to take over after the trustor’s death.
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mechanics-lien-california-300x200

Author: Staff

Investing in California real estate often involves renovations or new construction. Unless a real estate investor plans on taking a very do-it-yourself approach, this will require the assistance of contractors, suppliers, and design professionals like architects or structural engineers. You may even want to find a real estate agent with experience in renovations. In the event that someone who worked on a real estate project believes they have not received the contracted payment, California law allows them to file a mechanics lien on the property.

Mechanics liens can be troublesome for California real estate investors. They take priority over other liens, and state law sets a very short timeline for enforcement. Perhaps the most concerning feature for real estate investors is the ability of subcontractors to file a lien when the general contractor does not pay them. In that situation, the property owner is not at fault, but must still deal with the lien.

What Is a Mechanics Lien?

A lien is a legal claim that places a hold on real property, affecting any attempt to sell the property or obtain financing. Perhaps the most common type of lien is the one held by a mortgage lender on the property purchased with the lender’s money. If the property owner defaults on the loan, the lender can foreclose on the property. Foreclosure of a mechanics lien seeks to recover money owed to a person who worked on a real estate project.
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California-Wildfires-and-Real-Estate-300x200

Author: Staff

Wildfires are a major concern throughout California. In 2018, multiple major fires burned nearly two million acres of land, taking more than one hundred lives and causing billions of dollars in damage. The risk to life and property from wildfires is something that no California real estate investor can ignore. Because wildfires are, by definition, large and out-of-control, real estate investors cannot mitigate this risk on an individual basis. Investors can, however, make use of resources from the state and federal government when researching and planning an investment.

What Is a “Wildfire”?

The term “wildfire” generally refers to any fire that quickly spreads from its point of origin to cover a much larger area. California’s drought conditions have made enormous areas of land highly flammable, and wind can spread fires faster than people can run—or drive—away from them.

The California Public Resource Code defines an “uncontrolled fire” as one that meets one or more of three criteria:
– It “is unattended by any person”;
– The people attending it are not able to prevent it from spreading; or
– It “is burning with such velocity or intensity” that “private persons at the fire scene” would not be able to control it without the assistance of trained firefighters.
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Commercial-Property-300x200

Author: Staff

When it comes to choosing an investment property in California, real estate investors have a vast array of options. They can purchase a single-family dwelling and rent it to a tenant, or renovate it and flip it. They can purchase a multi-family dwelling or an apartment building for rental purposes. Commercial real estate offers even more possibilities, such as buying an existing office or retail building, renovating a commercial building, or purchasing raw land to develop from the ground up. Commercial investments often carry greater possibilities for revenue and profit, but they also often involve more risk, and more up-front work. The following is a general overview of the steps in a commercial real estate transaction. This hypothetical transaction involves the purchase of a property with the intention of renovating or developing it for commercial use.

Step 1: Find a Property and Build Your Team

Before you look at a single property, you should identify your goals and make a plan. Do you want to purchase a property that you can sell at a short-term profit, or do you intend to derive income from the property through rent payments? How much risk can you take on? How much time, effort, and capital are you willing and/or able to invest? Do you have investment partners? Are you putting together a real-estate syndicate? Do you need investment partners to contribute money or expertise? And so forth.

Next, you should visit many properties. Whether a property is “right” for you depends on your investment goals and your budget for both purchasing and maintaining a commercial property, among many other factors. Consider the current uses of these properties, and whether they fit your intended use or could be adapted to that use. Determine whether there are any uses that are prohibited for a property because of zoning or deed restrictions. Find out what permits you will need from multiple levels of government. Investigate each property’s potential for rent income, and the economic conditions of the surrounding areas. Above all else, find out why the owner is selling.
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