Nema Daghbandan is a Partner with Geraci LLP. His practice encompasses all facets of real estate transactions, primarily representing lenders, brokers, and loan servicers. His practice revolves around the preparation of documents and providing compliance advice to mortgage professionals related to nationwide commercial, residential, construction, and multi-family loan transactions. He also provides advice on documentation related to loan transactions, including servicing agreements, spread agreements, secondary market documents, leases, lien releases, procurement agreements, intercreditor agreements, and subordination agreements.
Mr. Daghbandan also possesses a deep expertise in loss mitigation and advises mortgage professionals in the management of defaulted loans and the remedies available to creditors.
Mr. Daghbandan has been recognized by his peers in the legal community as a Super Lawyers® Rising Star from 2016-2020. Only 2.5% of attorneys receive this distinction. He also received a perfect 10/10 rating from attorney review site AVVO®.
Episode Notes:
Narrator  This is The Norris Group’s real estate investor radio show the award-winning show dedicated to thought leaders shaping the real estate industry and local experts revealing their insider tips to succeed in an ever -changing real estate market hosted by author, investor and hard money lender, Bruce Norris.
Aaron Norris  Hey everybody welcome to the Norris Group Radio Show. Today we are here with Nema Daghbandan. He is a partner with Geraci LLP. He practiced, his practice encompasses all facets of real estate, including transactions and he primarily represents lenders, brokers and loan servicers. I met him through I believe it was AAPL or the what’s that stand for the, American Association of Private Lenders. And he and I were on a webinar, if you will, covering A.B. 1771, which we’re going to talk about today. His practice revolves around the preparation of documents and providing compliance advice for mortgage professionals nationwide. And this is not the first radio show that Nema has been involved in when it comes to helping investors and private lenders stay clear some legislation coming our way. So, Nema thank you for joining us. This is such an important topic. And I think what we’re going to do, this is a little visual for those who are on the, for YouTube, there are going to be slides I’m going to give Nema. So, he’s going to walk through the presentation outlining, outlining basically the presentation. So Nema, how do I hand this to you?
Nema Daghbandan  I think I can just try sharing screen for mine and seeing if that works.
Aaron Norris  Okay. Yep.
Nema Daghbandan 0How’s that working for you?
Aaron Norris  It says it started screen. There we go. Okay, let’s do it.
Nema Daghbandan  Alright, perfect and feel free Aaron at any time. You know, feel free to stop me here. Very nice to meet with your audience here today. I’m very thankful for everyone that is on here. You know, it’s, it’s an interesting thing. I think people oftentimes, whenever legislation comes up, people oftentimes think that the most powerful tool for legislation or combating legislation is lobbyists. As a person who has been involved with this for a few different instances, I don’t think it’s a good way to counteract proposed legislation. And what I mean by that is, is nothing moves politicians more than ringing phones. And so we have always tried to take an approach of when there is legislation that’s going to affect one or more industries, the participants who will be affected if they can cohesively tell their stories, and they can talk to their legislators, legislators are very interested to hear how this actually impacts because they have very good intentions, they’re trying their hardest. They’re, there, they’re in there, trying to solve a problem. They think this solves the problem. But they don’t actually know necessarily, and, and particularly when you get to the technical side of how the legislation is written, they don’t know the consequences. They’re not lawyers are not lobby, you know, they’re not in the industry themselves, right there. A person who’s going to talk about California real estate in one day, and then move on to health insurance the next, right? And have to speak with the same amount of passion on both issues, even though they know very little about either, right? So, that’s the, for those who are sitting on the sidelines of these issues. And thinking your voice doesn’t count or doesn’t matter, I cannot tell you from personal, is it. I’ve seen it change hearts and minds in real time. And there’s nothing that happens, like mobility and advocacy. And so there’s lots of ways to participate. And the nice thing about this bill is, it’s written so terribly that it affects everyone in California. So, you don’t need to be a private lender. You don’t need to be a Realtor you don’t need, if you own a home or might want to own one in the future in California, this affects you. So, without further ado, let’s get into it. So, actually, before is what is this thing called? It’s called the California Housing Speculation Act, what a noble name for it. What does this thing do? So, effectively is the, the bill as proposed would create up to a 25% California capital gain tax in addition to any kind of income tax or any other tax, and you sort of federal capital gains tax, any tax whatsoever, it’s just an additional tax that would occur if you sold or exchanged a property in less than seven years. It’s a sliding scale, but if you sold it in less than three years, it would be 25%. So, that is what this tax is. And what would they do with this money? They’re gonna create what is known as a Speculation Recapture Community Reinvestment Fund, tell you all about that in a second. It’s probably one of the more, the weirder things of this bill, as written. So, alright, um, why, why do this why are they proposing to tax 25% on the sale of the property? So, there, they’re citing research done by California Association of Realtors. Funny enough, we just signed off on a large letter with them. They are the lead advocates in this, in the anti, you know, trying to defeat this bill. And they will even say as well, that’s actually not what we said in our data point. But nonetheless, there’s a data point that exists and are they’re classifying this bucket of people who they’re calling investors, but they’re not actually say what an investor is? Is it an all cash buyer? Is it an iBuyer? Or is it a, you know, is it a wholesale purchaser? No one’s really defined in this term, but they’re saying is in California, for more data in the third quarter of last year, 51% of the buyers in California, were investors. And the national average at that time was 19%. Aaron and I have talked about that a little bit. And he’s like, that’s probably closer to about 19%, California, if you actually look through the data, but, you know, that’s not, that’s not where we’re at. So, and the key in this is, is, you know, the legislators being yelled at by the constituents, I can’t buy a house, I’m always getting outbid, you know, it’s impossible to get properties in California, you must do something and the prices are skyrocketing through the roof, you have to do something to help, right, that’s what is really driving this the any sort of push, right. So, and there’s belief that these investors are actually raising prices, in terms of the actual purchase price, so Well, versus a, you know, a person buying their primary residence. So, we talked about it earlier, there’s a sliding scale, it’s somewhere between as low as 5%, up to 25%, based on how long you’ve held the asset, right, so the first three years, it’s not 25%, down 5%, basically, every year, thereafter, seven years, no additional new tax. So, it also popped back on its net capital gains. So, for those who buy a property have carrying costs, you know, the fix and flip those sorts of things, it’s based on the net capital gain, not on the sale price, less sale price, or less purchase price. Um, so what property? This is one of the more interesting things about this bill, you would think that, you know, what they’re really trying to do is, is help people buy their first home, right noble cause great, um, but in actual application, any residential asset, so it could be a multifamily, it could be a single family, it could be a duplex, they don’t care, any sort of residential property would qualify for this new tax. So, let’s talk about a few exceptions. Now, you can kind of start seeing what I would say it’s a little bit of pragmatism being applied and where they’re kind of thinking through this a little bit, but still missing a lot of key concepts. The first here is that, you know, California has been as you know, kind of heavily promoting affordable housing and try to find ways to create affordable housing. Aaron’s you know, an ADU expert and knows a lot about kind of the promotion of creation of ADUs are really creating additional inventory, which is great. Makes a lot of sense when can help you get more affordable housing on the market. And then what they’ve also happened as well as in the past couple years, we’ve had the deed restricted properties, right. So, providing an ability to develop more, develop more units, so long as some of these units were deed restricted, in which at least x percentage had to be held for affordable housing purposes. And that deed got recorded against the property so that if a future buyer came in, they’re also restricted under the same deed restriction. So, there’s a permanency of these affordable housing units, right. So, this kind of follows what California is already been doing. It makes sense. If you buy a more than one unit property, and you place a deed restriction on it, making sure that at least 15% of the units are going to be used for affordable housing purposes. And it requires within three years of the sale exchange this, this law will not apply to you. However, just note that it’s only going to apply to the first sale or exchange. So, if you sell to a subsequent owner, they end up selling the property within seven years, they will get it with this tax even though it already had a deed restriction in place for them. Exception to make sense as well. So, really kind of developer if you buy one parcel you subdivided out, also exempting the portions which have not been sold out similar makes sense to people that are creating housing stock, they’re not trying to hammer them any further. The third one here is the what again, a somewhat nuanced one, but a good strength and also probably the biggest weakness and still, the goal of this is to promote and help people buy their first homes, as many of you already know, you know, the institutional Buy Box right now is really that first time homebuyer home. That’s what Pretium and Invitation Homes that’s what they’re targeting, right, because those also make very good homes. To rent, as the market has already told us. And so what they’re saying is, hey, look, this is the market that we’re most concerned about is first time homebuyers. And so if you’re a first time homebuyer and you’re buying this property, this doesn’t apply to you. Great. But that’s not a corollary to who is an investor, right, because I already own my own first home, many of you own your own first home. So, if I go buy my next home, right, if I upgrade or downgrade my home, well, guess what, when I sell my next home, I’m considered an investor at that point. Even though I’m living in this property, even though it’s my primary residence, it didn’t matter whether I had to move jobs to Northern California, or move somewhere else in the state just to live too bad, so, sad, you’re paying a tax, because you’re now considered in this bucket of investor under this law. So, it only applies to the first home purchased, and that person has to reside in that property for all seven years, they are exempted from this tax, but all other homeowners are not. And so this really isn’t an investor tax, it’s a homeowner tax, it’s anybody in California, is who this is going to apply to. Other exceptions. So, for example, if it’s actual commercial real estate, it’s an office building, it’s you know, a warehouse, whatever you want to call it. However, even mixed use properties, if there is any residential component, it would apply to those assets as well. So it really has to be true only commercial use. And you’ve got units that have current existing units that already have housing, deed restrictions in place for affordable housing, they would also be exempt, you know, dedicated spaces where you know, you dedicate a park to a playground or park or whatever those sorts of things would remain in place, properties that are otherwise exempt from from transfer taxes, which you know, is nothing, right. So, it’s a rare exception. So, then, who are the people who would apply it to? We already kind of talked about this, but it’s any individual entity, it doesn’t matter to their corporate tax, you know, corporate capital gain tax for my pure individual capital gain, so depends on who owns the asset. The two only exceptions to this role, are the active duty military personnel, or if a person dies, and a transfer occurs as part of the estate transfer, so it will not occur there as well. But again, your average homeowner who has bought their second home and chose chosen to sell or otherwise transferred, that second home, will get hit with this tax. And so really is is it applies to every homeowner in California, as who it applies to. This is also another, what I would say is heavy flaw of the legislation, which was follow the money. And so in this situation, when you follow the money and where the money gets put into, at least 30% will get placed into an affordable housing fund, with the purpose of creating, creating affordable housing. I don’t know whether that means they’re going to start, you know, the counties we started developing, will offer credits, they don’t say, there’s no actual methodology in here for what they will do with this money other than create affordable housing. Aaron has some great anecdotes about when municipalities have tried to create affordable housing, and how effective they have been today. Certain things government’s very good for what I’ve understood is building affordable housing hasn’t been one of them to date. Yeah, that is that. And then so well, what about the other 70% right? 20% to the school districts, which we love schools, but again, that doesn’t create affordable housing, because the purpose of your bill. 40% for transportation, I also love public transportation. But again, doesn’t create affordable housing, doesn’t lower housing costs. That was the purpose of this bill. And the 10% is, is to pay to the actual government to implement all this. And here’s another really interesting wrinkle when you think through how this legislation is written, is that these funds are in terms of allocation, where does the money gets spent, right? It’s at the county level, which county, right? It’s at the county of the taxpayer. So, you know, many, many people who are the investors are not actually, you know, whether you’re buying the property, it’s not where they live, as you may or may not know. And so, really, what you’re probably doing is making some very nice neighborhoods have much better transportation. So, we appreciate the intent here. But they’re not spending the money where it needs to be spent in the first place, which is the the property where the wood that was actually sold, which actually probably needs more affordable housing, that’s not where this is being spent. So, that even that 30% is being spent in the wrong County and being allocated to the wrong place. So, really unfortunate allocation of funds as well. So, not a particularly great bill when it would go in effect? It would go, if enacted January 1 2023. Next year, January one and then what’s happening? So, it was the bill was, the text was actually technically drafted in February sometime. But the, the way it worked that came out is I don’t know, it feels like an environmental bill or something like that, which is oftentimes the practice, they take a bill, they completely got it, they rewrite it, they create a new bill. That’s what happened here. So, on March 8, the this bill came in into was written, where it sits in the revenue and Tax Committee, and its assembly member Ward, who has proposed the revisions to this bill. It is a tax measure, and California requires two thirds of our legislators to pass a tax measure. In California, we have a Senate of 40 senators and 80 assembly members in this assembly. The current makeup, as you see on here is we have 31 Democrats in the Senate. So, we have more than three fourths in the Senate. And we have 60 Democrats in the assembly, we have exactly three fourths, which, you know, from a fractional math perspective means that they have the votes technically, on the Democrat side. However, California is we have a big big D party. And so you know, we have lots of what I would call business Democrats who often vote fiscally conservatively, even though they are socially liberal, right, it’s probably a better way to describe it, we probably call them, you know, Mitt Romney, Republicans in most other worlds, right. So that’s probably what they look like, it’s so this is definitely no walk in the park, as written, even with our current makeup, you need to lose, you know, at least four Democrats in the Senate, and at least six Democrats in the assembly, which is, you know, probably highly likely. And the very next step is it actually has to come up and be brought up in the revenue and Tax Committee, I looked at the calendars, and nothing’s coming up for the next few weeks here. So, currently, it’s not even being proposed. And oftentimes, these sorts of deals die in committee. So ,that’s our hope, in this situation in the first place, is that this thing never sees the light of day never sees a further vote, it just sits in a committee was a idea. And doesn’t become much more than an idea. So, we’ve already kind of identify militias kind of capsulate. Like why, you know, why such opposition? So, first things first is, you know, we’re not pro, you know, we want affordable housing, all of us do. And we really, really, and there’s lots of ways to do this. And the beautiful thing is, many states have demonstrated this right that the number one issue with affordable housing is the cost to build the housing, right? That’s not changed, and it’s not going to change. And so until there are measures directed at making it cheaper to build homes, you’re not going to make a house more affordable. So, you’re dealing with systemic issues altogether. So, what is, is this bill, as you already identified as there is nothing in it to create affordable housing, there is no you know, other than create a 30% pool of funds to allocate towards it. There’s nothing in it to actually create an affordable house or to to reduce the price of houses whatsoever. In fact, it will make it worse, because what will happen is me when I go buy my next home, I’m not going to leave that home, right? I have a pretty strong disincentive to not take the job in Northern California, not leave the state not do not otherwise be mobile, and place my house for sale, because I don’t want to pay 25% taxes on that sale. Is makes no sense either. So that we will actually reduce the housing inventory, which is really one of the biggest issues we have here. That’s also what was California Association of Realtors primary argument back, which was, by the way, we don’t have inventory, this hampers inventory. That’s the problem you have here. We already talked 30% of the funds is all that’s allocated and it’s going to the wrong place in the first place. And it’s targeting the wrong people. If you wanted to have a housing speculation bill, I don’t think people like you and I and who are buying our next house to live in? I don’t think we’re speculators, right. And so, pretty wide net being cast as the audience. So, that’s the you know, that’s in you’ll see, we’ve written a lot of letters and collateral. And we’ll talk about that in a second here of kind of what can you do, which all kind of identify these are the problems, right? And we’d love to have a conversation with Assemblymember Ward, about ways to promote it, you know, and I think, you know, I’m not the expert, I’d love to send Aaron down there and says, ‘Look, you know, me as someone who builds properties, and knows how to build properties and knows how to create affordable housing. Let me tell you what’s working”, right. Here’s some great suggestions. So, it’s, it’s not just No, it’s no, and here’s what else we can do, right? There’s some real tangible ways to do this together. So, you know, what can you do? You know, right now is, is, I doubt you need to talk to your Republican legislators. I suspect we know where they’re gonna fall on this bill. If you have one, you can make them aware of it. But you know, not particularly the odds. We need some defections here from, from the Democratic side, spreading the word. You know, it’s interesting, this has been one of those issues I’ve been involved with in a good number of mobilization efforts. And normally, they just affect private lenders. Because my way profession, that’s generally the demographic I’m representing. And so those are the pieces of legislation that I’m generally tracking. So, I was interested in the ADU stuff. But you know, it was more of just my general interest as a, as a person that likes real estate versus something that was very tangible to my client base. But the interesting thing is, despite the wide net of this thing, there actually hasn’t been a lot of pickup of this issue. I’ve seen, it’s really weird, because it’s actually a lot of new sources picking this up, you know, actually, you know, ABC4, and all these sorts of things. But I think, because this thing is called a speculation app, it’s talking about investors, that people don’t realize it just actually affects every homeowner. And I think that’s probably the disconnect. And so really trying to get the word out that this isn’t about private lenders, it’s not about real estate investors, it’s yes, you’re also picked up in this dragnet as well, right and have in for private lenders, the downstream effect. But in reality is this is bad for California residents, that’s what’s bad for so it really needs to get more attention. And the louder that, that contact base becomes, the less likely this comes into play. And then also to is even, you know, let’s just say it, they fixed the investor argument, right? Let’s just say as, hey, we’re gonna make sure that if it’s your primary residence and you live in the property, then we’re going to exempt that property altogether, right, as long as it’s it remains your primary residence, they get rid of the whole silly first time homebuyer aspect of it. It’s also misguided, right, because let’s just, you know, play this out for let’s say, let’s just say as they fix that, it’s just for real estate investment screening, your real estate investor and you sell the property the next seven years, what are you going to do? Right? And you all know the answer to this, right? Okay, well, I guess I’m not going to flip the property, I’m gonna hold it, I’m gonna turn into a rental, right, and I’m going to go get a loan on it, and I’m going to just do the cash play until I can make this thing play itself out, right? There’s other strategies that can be employed here, right, it’s not going to really stop the activity, what it’s going to do is it’s going to stop the inventory, right, you’re going to fix the prop, you’re going to flip the property, right, you are going to pick something that wasn’t livable, right? May have not a CEO, or really need a lot of work done to it, and you’re going to turn it into a unit that someone could actually live in, and probably raise the property values of the neighborhood make it a beautiful property live in really, you know, add value to the whole thing. And and you won’t, right, so, so what this really does is it effectively probably creates more rental properties altogethe, right? Um, and, and that’s not necessarily a good thing, right? We don’t really, you know, while we need units, period, more rental units isn’t necessarily the solution to this problem, right? Particularly when you’re talking about first time homebuyers trying to buy a property. So, you know, the good thing on this one is thankfully, that they actually kind of did a wide sweep on this one, you know, normally you don’t see this sort of roster of people working together. You know, California Mortgage Bankers Association, oftentimes is more fixated on the call to commercial multifamily world, right. So, but this attaches multifamily. This does this as much as it does single family. California Mortgage Association and American Association of Private Lenders are obviously mortgage lending associations clear, you know, clear interest, you know, although tangential, right, we make loans to the people who are in this business, so we make loans real estate investors, ThinkRealty is is, you know, obviously there on the real estate investor side, California Association of Realtors is really, you know, thankfully in this fight with us as well, and they have a, you know, an outsized voice in California. And so, you know, they’re up in arms over this thing as they should be. And so we’ve got a lot of positive momentum. And in terms of what’s happening in real times, is we just signed off, we actually just start pushing this on socials today. California Association of Realtors, along with these organizations, and a lot of other organizations just submitted their official letter over to Assemblymember Ward and all the members of the Revenue and Tax Committee. And this was not a, you know, recommendation letter of like, ‘Hey, here’s the ways to fix it.’ It was this is misguided, this gaming is to stop and just, you know, we, we don’t want to see a new and novel version of this, we want you to end this immediately. So, that was a letter that was being sent out. And that’s the status quo currently, as it sits. So that’s great that we’ve got kind of that mobility happening. But again, it’s primarily what I would say, as a lobbyist driven game right now. So, you’re seeing, you know, California Water Station, California Mortgage Association, they have lobbyists, they’re talking, that’s great. lobbyists have definitely a voice. But not a, not the compelling one, because I’m assuming because you know, who else has a voice is, is the people in Assemblymember awards jurisdiction, who are saying is bring down these house prices help me right, so there’s plenty of voices out there. And so just, you know, I think that people give more credit than credit’s do particularly in defeating legislation. lobbyists, I think, are very good at helping craft legislation because they bring a voice into the room of saying, hey, yeah, this works, but this but you know, here’s some minor tweaks, they’re really good at hacking away at legislation and making it making it make sense for that. The fact that trade organization, and they do a really good job and oftentimes help fill in the gaps when you’re creating legislation. When you’re, when you’ve got trying to defeat legislation, lobbyists are generally not the right tool for that toolkit, it is advocacy, and mobilization and phone calls and letters that moves that needle a lot. So, we’ll talk here in a second too, about what you can actually do. So, in this lecture, kind of be our last slide here, before we hit questions, which is, we’ve got a website up, and I think Aaron already kind of probably dropped it in, in various links here. So, here’s what you can find on that website, which is very helpful. There are three different letters, you can just download. And Aaron, thank you, because Aaron helped draft the real estate investor letter. And so if you go to this website, you can find one written from a private lender. So, if any of you are listening on here, and you’re ever, you know, a trustee beneficiary on any loans, you can write one directly on that behalf and explaining the role that, that, that private lenders have in this, you know, we give loans to real estate investors and real estate investors. You know, help stop this bill. Our real estate investors are out there creating housing inventory, we have one from the real estate investor standpoint as well, I’m a real estate investor, here’s what I do I employ this number of people, on an average job I develop in these areas, what is the role you’re doing? How are you adding, how are you solving the problem, realistically, not someone that should be taxed. And then lastly, is what I call the dragnet is you’re a homeowner, right? I’m a homeowner, and I want you know, I want to buy property and I want to be able to move, right? You, I can’t move because of this, this is crazy. And if you’re trying to create inventory, well, here’s a great way to do is lock up every person in their home for seven years, that’s a great way to create it. So, you know, that’s a those are a few different ways to and then lastly, is anyone listening in San Diego or, or have the connection into Assembly Member Ward’s office, we would love to just put together you know, a real meaningful discussion. And not a your you know, you don’t know what you’re talking about, I think we’d like to help us understand the problem you’re trying to tackle? Have you thought about these issues? Where do you want to? You know, what do you think about that second homeowner was trying to buy, you know, give me your understanding of what real estate investors are doing? Are all real estate investors the same, right? Do you think Blackstone is the same as the guy who’s flipped five projects in this last year, because of this legislation, they all treated the exact same, right, you’re gonna treat these two parties the same way. So, so really trying to get a good dialogue going there as well. So, but you know, the biggest thing you can do is, is take this share it, you know, on your own social media and your own, you know, your own REIAs is all this sort of stuff, is get that out that we’ve tried to provide as much collateral to make it as easy as possible. So, if you go to the website here, it there’s the letters there, there’s the contact information for the assembly members that are on the Revenue Tax Committee. I mean, you just got to pop in addresses of your address, their address, fill in some blanks, and you’re off. Better yet, if you want to give them a phone call. It’s 10 times better than that letter in the first place. So, um, you know, voice, you know, give, put your voice in there and spread the word, there’s nothing more that, that you can do. And if you do that, I’m telling you, it’s, you know, that is much, much more important.
Aaron Norris  That’s it for this week. We will air the second show next week, but in the meantime, you can go to the link that we post in the show notes aapl.com with links to sample letters that you can use to send to your legislators. We’ll see you next week.
Narrator  For more information on hard money, loans and upcoming events with The Norris Group, check out thenorrisgroup.com. For information on passive investing with trust deeds, visit tngtrustdeeds.com.
Aaron Norris  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.
What you can do to help
Communicate your opposition to legislators via phone, letter, and email. You may download and customize the sample letters below to tell your personal story of how AB 1771 will affect you and your business.
VISIT: https://aaplonline.com/articles/advocacy/ca-flip-tax/