Proposed California and New York bills will significantly impact private lenders.

When it rains, it pours. Within 10 days of each other, California and New York proposed legislation impacting our industry. As of the time of publishing, California seeks to add a capital gains tax to nearly all residences sold within seven years of purchase, while New York is once again looking to require a license to transact commercial (business purpose) loans.

California AB 1771 Flip Tax: What You Need to Know

California AB 1771 will charge an additional 25% capital gains tax on almost every residential property sold within three years of purchase.

The additional tax would decline in annual increments until the property has been owned for more than seven years.

Legislators proposed AB 1771, also known as the California Housing Speculation Act, on the misguided notion that soaring prices of California homes are driven by real estate investor purchases of residential properties in California. The bill lacks nuance, with the chief issues being:

  • There are no carve-outs or exemptions for equity earned through property improvement.
  • Except for a few narrowly defined cases, the bill lumps in consumer homeowners.

One reason we believe policymakers think real estate investors are to blame for the present affordable housing crisis is the data they are getting on “fix-and-flippers” (home sales where the buyer is an entity and the home is resold within a year) includes iBuyers. Whereas “real” real estate investors make substantial improvements to the property, most iBuyers make few repairs. Zillow reported spending an average of $5,555 per residence in fourth quarter 2021.

iBuyer’s stated goal is to control the transaction from end to end and make money on each part of that transaction. The result is that their entrance into the market has skewed the real estate investor data to make the whole sector look bad. At the same time, they don’t care about the capital gains tax because that’s not where they’re hoping to earn a return. These are tech “startups” backed by billions, playing out an experiment with disastrous results—even for themselves. As Opendoor said in their 2021 fourth quarter 10-K report to the Securities and Exchange Commission, “We have a history of losses, and we may not achieve or maintain profitability in the future.”

Although tech companies and their experiments come and go, in its effort to decrease real estate speculation, this bill will permanently decimate the rehabilitation of substandard, derelict, or vacant housing stock. The tax means there will be little or no return on investment for mom-and-pop fix-and-flip professionals making needed renovations. These are local real estate investors who support the housing market and ancillary industries from a real end-to-end perspective, including realtors, lenders, contractors, and escrow professionals.

The bill also removes one of the chief draws of homeownership vs. renting—the potential to earn equity—for those not certain of their ability to stay in their homes for the duration of legislators’ arbitrary timelines or who must sell due to exigent circumstances.

In addition to causing new problems for California’s current and prospective homeowners and affordable housing stock, the bill fails to address another cause of the state’s housing crisis: Large institutional investors are purchasing residential properties in the first-time-homebuyer price range and turning them into long-term rentals. These buyers frequently price out potential homeowners with all-cash offers above market comps. Because these institutional investors are not reselling, they are not subject to the bill’s premise. They make their money from tenants, not resale, and their activity is difficult to monitor because they purchase through multiple and often-changing entities.

The proposed timeline and amount of additional capital gains tax is as follows for homes sold within a certain number of years from the initial purchase:

  • <3 years: 25%
  • 3-4 years: 20%
  • 4-5 years: 15%
  • 5-6 years: 10%
  • 6-7 years: 5%
  • >7 years: NONE

Finally, although the bill’s text says the purpose is to put the resulting tax funds toward affordable housing, only about 30% of the additional taxes are specifically allocated for such efforts. In addition, the monies raised will be distributed to communities based on where the taxpayer resides, not where the “needed affordable housing” property is located.

Next Steps. AAPL, our sister company Think Realty, and ally organizations including the California Mortgage Association and the California Association of REALTORS®, are fully opposed to this bill passing in any form. In addition to formal joint opposition letters, we have started a public petition and provided sample letters for you to customize and send to your California representatives at aaplonline.com/ca-flip-tax. There you can also find additional bill analysis and overview videos.

Not a California resident or domestically or foreign-licensed business? You should still care about this bill! We’ve seen it time and again: State legislators get ideas from one another. A show of force here will demonstrate to other states the battle they will face if they seek something similar. You can help us get the word out by sharing the social posts linked at aaplonline.com/ca-flip-tax.

New York A1420/S1061 Commercial Licensing: What You Need to Know

If you’re feeling déjà vu, you’re right on the money: This is the same bill you likely heard us talking about in early 2021, with earlier (unsuccessful) versions also proposed in the 2019-2020 legislative session.

Although the bill went nowhere following its proposal—and our subsequent immediate loud opposition—in January 2021, its sponsor amended and recommitted it to the Banks Committee in mid-March 2022. As of the time of this writing, the only material change to the bill is that 50% of the funds generated via these new licensing fees will be distributed via grants to minority- and women-owned businesses that fit certain criteria specified within the bill text. Below is our original analysis of the bill:

New York is proposing a law via Assembly Bill A1420 and corresponding Senate Bill S1061 that will require private lenders and other persons to obtain a license before providing certain loans and other financial products to businesses located in New York.

Loans and other transactions covered. Licensing would be required to make loans of $500,000 or less to businesses located in New York for the purpose of assisting the businesses with their capital needs (Covered Loans). This requirement would apply to both secured and unsecured loans.

Licensing would also be required to provide other “commercial financing products” to New York businesses, including lease and accounts receivables transactions of $500,000 or less (Covered Transactions).

Lenders and other persons covered. Licensing requirements would apply to:

  • All persons making Covered Loans or other Covered Transactions to New York businesses.
  • All persons paid to refer Covered Loans or other Covered Transactions to New York businesses.
  • All persons marketing Covered Loans or other Covered Transactions on behalf of persons who make Covered Loans or other Covered Transactions.

Exemptions. Licenses would not be required for:

  • Persons making five or fewer Covered Loans or other Covered Transactions during any 12-month period.
  • Banks, credit unions, insurance companies, trust companies, and similar companies.

We believe passage of this legislation would:

  • Lower the capital deployed into the New York economy as private lenders choose to lend their money elsewhere.
  • Dramatically increase interest rates for commercial loan borrowers due to private lenders’ higher operating costs and fewer private lenders competing in the New York market.
  • Decimate the inventory of affordable housing as commercial borrowers intentionally avoid smaller balance loan transactions due to the lack of capital available and the higher cost of borrowing.
  • Hurt local trade jobs that depend on business income from commercial borrowers.

Do we need to worry about this? The concerning factor here is this bill’s longevity over two consecutive legislative sessions. The latest attempt jumps on the post-COVID assistance bandwagon, alleging that minority and women-owned businesses in New York were left out of the Federal Paycheck Protection Program and are in “desperate need of funding to employ and/or pay staff, purchase inventory and pay rent and utilities.” This may be true, but we question the motives involved that would establish the Minority- and Women-Owned Business Development and Lending Program, outline that program’s grant eligibility criteria, and provide for its funding—all within a seemingly-unrelated bill on commercial licensing.

Our main concern is the program’s inclusion was designed to make this bill a must-pass effort since its previous iterations died in committee. Although the Minority- and Women-Owned Business Development and Lending Program may be a worthy cause, it does not belong in A1420/S1061.

Next steps. We have reopened our petition opposing the bill and will be reengaging our partners and ally organizations in our advocacy efforts. You can download and customize a sample opposition letter at aaplonline.com/NY-ab1420. We will keep that page updated as we monitor the bill’s progress.

Even if you are not a New York constituent, please help us get the word out. It may not affect you today, but New York is traditionally the rallying ground for legislation that snowballs.