What Disclosures Must a California Real Estate Investor Make When Selling an Apartment Building?

DramaticSFskyline2017Author: Staff

Buying real estate is a risky venture for investors, with buyers betting on the property increasing in value or producing a revenue stream through rental. Buyers also take various chances regarding unknown defects in the property’s title, or defects in the property itself. Researching potential defects is a critical part of any California real estate investment. California law requires sellers of certain types of real estate to make a variety of disclosures to buyers, in the interest of giving prospective buyers as much relevant information as possible. Most of these disclosure rules apply to residential real property. Some investment properties, such as rental houses, are subject to residential real estate disclosure requirements. The sale of an apartment building with more than four dwelling units, however, is not necessarily subject to those rules. It is, however, subject to other disclosure requirements, including known defects or hazards, particularly environmental hazards. California also requires disclosure of certain earthquake risks.

Residential vs. Commercial Property

Residential properties, defined as properties with one to four dwelling units, are subject to a substantial number of disclosure requirements in California. Residential rental properties can appear to fall into both categories, since they are residential for tenants, but commercial for owners. Rental houses, duplexes, and other small structures generally fall under the “residential” category. Sellers must follow the residential disclosure guidelines, even if the buyer is another investor. Larger apartment buildings, on the other hand, are not necessarily subject to those requirements.

Common Law Disclosure Requirements

A 1963 decision by a California appellate court, Lingsch v. Savage, establishes that sellers of commercial property have a duty to disclose any facts known to them that “materially affect[] the value or desirability of the property.” Failure to do so with the intention of inducing someone to purchase a property can result in civil liability for fraud.

Statutory Disclosure Requirements

Sellers of commercial real estate must make certain environmental and health-related disclosures, such as asbestos or other hazardous substances on the property. Federal law requires disclosure of lead paint in structures built prior to 1978.

If a seller of commercial real estate is not a resident of California, they must disclose this to state tax authorities. If they are not located in the U.S., they must disclose this to the IRS.

A law requiring commercial property sellers to make detailed disclosures regarding energy usage was repealed in 2015, and replaced with a law requiring utility companies to make those disclosures.

Earthquake Disclosures

If a property has a water heater installed, sellers must certify that they have complied with state laws regarding proper anchoring of the unit to prevent earthquake damage. The California Seismic Safety Commission (CSSC) has issued a series of guides, including a “Commercial Property Owner’s Guide to Earthquake Safety,” most recently updated in 2006. This guide includes a “Commercial Property Earthquake Disclosure Report.” Sellers of commercial property in Seismic Zone 4 must provide buyers with a copy of the earthquake safety guide and disclose earthquake damage risks related to unreinforced masonry on the property..

The “seismic zone” system is considered largely obsolete, but is apparently still used by the CSSC for disclosure purposes. Seismic Zone 4 is the area of the state that contains fault lines, and is therefore considered at greatest risk for earthquakes. It includes the entire coastal area of California, as well as inland areas that are mostly located in Riverside, San Bernardino, Kern, and Inyo Counties. It does not include the Sacramento area, or most of the Central Valley.

More Blog Posts:

What California Real Estate Investors Should Know About Buying Apartment Buildings, Titles and Deeds, March 22, 2018

Common Interest Developments, Homeowner Associations, and California Real Estate Investments, Titles and Deeds, January 10, 2018

How To Find The Perfect Vacation Investment In San Diego, Titles and Deeds, January 3, 2018

Photo credit: Joshualeverburg1 [GFDL or CC BY-SA 4.0], via Wikipedia.