AB 889: More Transparency on Rental Housing Providers

Assembly Bill 889 introduced by Assemblymember Gipson in February would require landlords who hold rental property in the name of a corporation or limited liability company to report the identity of the beneficial owners to the California Secretary of State. Renters Alliance supports full disclosure of ownership interests and so does Beverly Hills: the city’s legislative liaison committee agreed to support the bill in Sacramento. Let’s take a look at AB 889 and why we support it.

Assembly Bill 889 is simply a disclosure requirement: a landlord who receives substantial economic benefits from ownership, who exercises substantial control over the property, or who owns 25% or more of equity interest and who holds the rental property in the name of a corporation or limited liability company would be required to report the identity of any beneficial owner to the California Secretary of State.

Excluded from disclosure are minor children, a custodian or agent for the beneficial owner, or an employee whose control over, or economic benefits from, the rental property “derives solely from the employment status of the person.” Likewise, future heirs are excluded from disclosure.

Why is this legislation necessary? Because when the beneficial owners of rental real estate are not known, then they are effectively shielded from accountability; the bad-actor landlord cannot be named and shamed, for example, and patterns of problematic management practices across a portfolio of properties cannot be easily established. AB 889 would unmask beneficial owners to hold owners accountable.

LLC

Today owners of Beverly Hills residential rental property fall into one of a few categories: named individual(s), trusts, corporation or a limited liability company. When a rental property is individually-owned the beneficial owner is known; the name is on the deed. Same with trusts which come with tax advantages. These are old-school. Many long-held rental properties in Beverly Hills are owned by individuals or held in trusts.

Investors and speculators and newer buyers generally tend to hold property through a corporation or limited liability company principally because these structures shield beneficial owners from personal liability for business’s debts. An LLC offers a property owner two additional advantages: simpler tax treatment and obscurity in ownership.

Corporations pay tax on earnings and then pass profits on to shareholders. That income is then taxed as personal income. LLCs with multiple members, in contrast, can pass on all profits to members who pay tax on it as personal income. Such ‘pass-through’ entities enjoy a much simpler tax structure.

The benefits of the LLC, plus the low cost and convenience of registering one with the state, make LLCs especially popular vehicles to hold large property portfolios. Take for example the Markowitz family which are landlords to many renting households in Beverly Hills. The family behind Factor’s Deli has chosen to organize their extensive portfolio exclusively through LLCs.

Libby Markowitz network
CorporationWiki graphs the constellation of ownership entities and family members associated with Libby Markowitz.

We know the extent of their holdings because they have not obscured their holdings but find the LLC structure convenient for business. Moreover, an LLC is easy and cheap to create: simply file articles of organization with the Secretary of State ($70), shortly thereafter file a statement of information ($20) and then pay a minimum $800 annual tax to California’s Franchise Tax Board.

Hidden Ownership

When a rental property is held through an LLC the deed shows only the name of the LLC — not the names of the beneficial owner(s). Moreover the name of any beneficial owner need not be disclosed to the public; only an agent designated to receive legal papers on behalf of the LLC must be disclosed, along with a physical address for process service. Often that is a law firm on Wilshire Boulevard or in Century City. There is often no beneficial owner at that address.

It can be especially challenging to trace ownership by following the breadcrumbs because organizing an LLC can be done through a corporate agent. Even the named managers on the LLC can be professional ‘nominee managers’ whom are available for hire. Moreover, an LLC can be managed by another LLC.

SOS LLC filing example
This LLC form filed with the Secretary of State shows how easy it is to nest one LLC within another simply by designating an LLC as a member or manager.

When an LLC is managed by another LLC or even multiple LLCs then it becomes a challenge to identify the beneficial owner(s). It is a tough nut to crack for a tenant’s attorney looking to ID the beneficial owner to hold them accountable. So appealing is anonymity to these landlords that the California Lawyers Association (“The bar association for all California attorneys”) advises owners how to obscure ownership.

Not all rental property owners seek anonymity even when using LLCs. The mega-landlord Markowitz family, for example, has a vast proprty portfolio and the dots can be connected by digging through the Secretary of State forms. The website Corporationwiki.com can do it for you as the entry for Libby Markowitz shows.

Sometimes it takes more dogged digging to identify the beneficial owner behind a rental property. We start with the LLC forms and search every name and address listed therein. If that turns up nobody then we look through city business licenses and city permits. Very often we can turn up a name. We can work the case backwards by Googling the name to find other properties using permits, past court filings and so on.

AB 889 would save us the effort because it would require every beneficial owner of rental property to be revealed to the public. The bill is now awaiting a Judiciary Committee hearing in Sacramento.

Renters Alliance supports AB 889

We support AB 889 for a variety of reasons related to disclosure and accountability. First, we want to identify patterns of problematic property management. That’s how we connect actual owners to bad business practices like mistreatment of tenants and poor maintenance. AB 889 would allow the community itself to hold landlords accountable when the city doesn’t do a good job of it.

Second, we like to know when adjacent parcels are owned by the same owner. The strategy of the speculative investor is to buy a rental property then add then the one next door and maybe a third. When the parcels are assembled it is sold to a developer. That’s what happened on 149–159 South Maple. The sale of three properties by the same owner at the same time signaled a coming redevelopment project.

Third, identifying the property owner provides some measure transparency for prospective tenants. Beverly Hills landlord representatives once said that prospective tenants should do some due-diligence before renting. However landlords know better than any tenant how little information is available to the public when the landlord wants to hide behind an LLC and a property manager.

For example the city makes zero information available to prospective tenants such as the record of code violations or a history of undertaking work without permits. Both are a red-flag for a certain kind of owner. Has the landlord operated for years without a business license? No such history is available. At the very least AB 889 would put a name to the property.

Fourth, knowing the beneficial owner is a step to disclosure parity. The management obtains a top-to-bottom X-ray of a potential tenant when the tenant applies to rent: income, assets, employment and rental history — even personal testimonials to character. Tenants get no such information on the property owner. We don’t even know if the leasing business is upside down because debt is too great relative to income. Tenants get only a lead paint disclosure!

Fifth, property ownership is an important piece of information for policy-makers. Regulation of the local rental market can only be effective when we have the necessary information. Landlord interests fought tooth-and-nail to oppose rental unit registration in Beverly Hills. We got it, though, and now we need to know who owns what so that the city itself can connect the dots concerning problematic management.

Last, we need disclosure of beneficial owners so that we understand potential conflicts-of-interest. Every official who “makes or influences governmental decisions” under state law is required to submit a Statement of Economic Interest to the California Fair Political Practices Commission. The statement discloses investments but sometimes those investments don’t clearly identify rental real estate. AB 889 will help us know who is receiving a substantial economic benefit from rental property ownership while making decisions that affect tenants.