Revisiting SB-1079 in 2022: Highlights, Lowlights, and How We Litigate Going Forward
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SB-1079, through its changes to the non-judicial foreclosure process, brought significant opportunity (and new risks) to potential homeowners and entities alike. The bill, signed into law in California at the start of 2021, opened the door for various Litigation concerns to crop up for lenders and litigators alike in 2022 and beyond.
- The intent and subsequent impact of SB-1079 being signed into law.
- Evidentiary issues regarding individuals presenting as Eligible Tenant Buyers, Prospective Owner Occupants, and Eligible Entity Bidders in the process.
- The potential impact of the bills the legislature has put forth so far in 2022.
- Additional litigation concerns moving forward.
All right, so welcome everybody. My name is Jacoby Perez. I'm a litigation attorney with the Geraci litigation team. Today we're going to be doing what's essentially part two of looking at California's SB 1079 revisions to the non-judicial foreclosure process when one to four residential units are involved. As a couple of preliminary matters this presentation is going to be recorded, slides will be distributed afterwards. If you have any questions don't use the chat box. Instead, there's a q and a function. Feel free to put your questions in there and we'll respond to the questions at the end of the meeting. Time permitting. So as I kind of alluded to, we had done an initial iteration of our look at SB-1079 back in January or so, and what we were looking at there was essentially what is SB-1079 and why was it enacted?
And we kind of went through really the functional changes of SB-1079, how it was going to change the non-judicial foreclosure process from one that primarily happens on the courthouse steps to now adding this 45 day window after a trustee sale in which eligible bidders, whatever that means, <laugh> can submit bids to potentially become the owners of the property. So today we're going to be looking at, we will briefly overview what SB-1079 is, but the focus of today really is going to be how effective is SB-1079 at accomplishing its purpose of promoter owner occupancy or really to be more specific how ineffective it is. And we're going to be looking at kind of the major problems that we're running into, particularly on the litigation end with respect to SB-1079. And we're finally going to take a look at how the legislature is considering addressing it.
As of now, there's a specific bill before the legislature trying to address some of these major problems. So that said, what are those big problems that we're seeing with SB-1079 from the broadest, broadest kind of perspective? And the first is this lack of enforceability of the affidavit of eligible bidder that SB-1079 requires. The way that SB-1079 is set up is that It's supposed to give these categories of eligible bidders an advantage over regular investors in the hopes of promoting owner occupancy through these trustees sales. And the way that SB-1079 confirms or makes sure that you are an eligible bidder is it requires the submission of an affidavit under penalty of perjury in which you certify that you meet the categories or you meet the requirements of whichever category of eligible bidder that you're bidding under. The problem is all it requires when you fill out this affidavit is you have an intent to meet those requirements.
It's not clear whether you actually have to follow through or to what extent or to what extent might a change in circumstances justified not following through. There's just not clear direction from the courts and or the legislature on specific causes of action and penalties for failing to follow through. What we've seen as a result of that is unscrupulous investors trying to shoehorn or expand their qualifications to meet these category of eligible bidders to the detriment of scrupulous or what we'll say actual investors that are required to compete at the trustee sale alone. And the next related major problem to this question of enforcement is, as we talked about in the last webinar and will hit on again today, as these categories of eligible bidders move further and further from this ideal owner occupant category, when we start to get into these entity categories of eligible bidders you really start to see that they're so poorly defined that they do two things.
One the entity category set up are ostensibly meant to encourage affordable housing, but they're so vague that it's not clear what that even means. And two, kind of as we alluded to earlier regarding unscrupulous investors, these undefined or poorly defined categories actually incentivize fraud because the unscrupulous investor who if we're not going to enforce penalties against them, essentially has an advantage over everybody by exploiting this SB-1079 setup. So, I would argue that these categories, particularly the nonprofit entity category and the LLC category, need a substantial overhaul to come close to being functional within this SB-1079 scheme that's being examined. So our agenda today, first I mentioned we're going to briefly touch on what is SB-1079, why was it enacted? What is an eligible bidder? We'll take a look at the categories what is eligible bid there? We'll talk a little bit more about that affidavit issue.
We'll look at AB-175, which was an amendment to SB-1079 that was enacted in 2021 and became effective this year addressing some of, I mean, it didn't do a whole lot, but it was more a clarification of certain vague procedural requirements in the SB-1079 setup. The biggest changes, I guess you can say, or really clarification was that the notice of intent to bid has to, within the 15 day period, has to also be accompanied by that affidavit that we're talking about. We'll take a look at some of the litigation issues surrounding what an eligible bidder is, some of the litigation issues we're seeing surrounding eligible bids. And then finally we'll take a look at that AB 1837 that the legislature is considering. And it's really an interesting piece of legislation because it seeks to make some pretty dramatic changes to this SB-1079 setup acknowledging those two biggest problems that we talked about earlier, the lack of enforceability and the vagueness in the entity eligible bidder definitions.
So what is SB-1079? SB-1079 enacted in 2020, effective January 1st, 2021. And as I mentioned, it brought these dramatic changes to the non-judicial foreclosure process when we're talking about one to four residential units. The idea was that in the wake of Covid 19 and the moratorium was being lifted, there would be a wave of foreclosures similar to what we saw during the Great Recession. And the concern was we did not want to see a similar transfer of ownership of property from actual owner occupants to institutional investors. So Skinner proposed SB-1079 with the idea that we'd get out ahead of this expected problem and build into this non-judicial foreclosure bidding process, some incentives, some advantages for prospective owner occupants so they'd have a fighting chance against these investors.
So how does it do that? One, it limits itself to one to four residential unit property. Again, the purpose is focusing on owner occupants moving into their own homes. So it makes sense to limit this new property that can actually be lived on that's actually residential <laugh> and that they're actually going to live within the property. So commercial property, it doesn't make sense to apply the structure for, that's not serving the purpose of the bill. Kind of similarly sellers were excluded from bundling homes together like they had done before during foreclosure which are then sold to a single buyer. Again, the idea was that they were going to be sold to individual owner occupants. So let's have individual sales for each foreclosed home. Otherwise, these categories of eligible bidders and the bidding process itself doesn't really make a lot of sense. And what we mentioned, and this is really where most of the problems lie, is this 45 day window that's built into SB-1079 after the trustee sale, in which where as investors are required to submit all of their bids at the trustee sale. If you meet a category of eligible bidder, there is this 45 day window in which you can complete a bid and potentially become the owner of the property.
So what are eligible bidders? Who gets the advantages or the perceived advantages of this system? And the first category I guess you could say the first kind of ideal category is the eligible tenant buyer. Eligible tenant buyer is kind of exactly what it sounds like. It's someone who's living on the property as a tenant at the time of the trustee sale. They have to have an arms length agreement with the borrower predating the notice of default. And again, this arm length issue, they can't be a family member of the borrower. So with someone who's living on the property who then the property goes into foreclosure, they want to become the owner of the property. The other category of ideal eligible bidder is a prospective owner occupant. A prospective owner. Occupant is someone who, although they don't live on the property predating the foreclosure sale they intend to move onto the property. So they're required to submit an affidavit, a testing to their intent of the following, that they'll occupy the property as their primary residence within 60 days after the trustees deem being recorded that they'll live on the property for at least a year. And again, that there's an arm's length relationship here where if they're not the borrower, they're not the borrower's family member and they're not acting as the agent of any other person or entity who's buying the property, they are going to be the ones that's going to live on the property.
So you have those two categories, and I think mean at least for what SB-1079 is, it does create advantages for those kind, that kind of perspective. Home buyer. I mean basically the idea was that if you have this 45 day window, it, it's a cushion where before when you had these trustee sale and you had investors versus these prospective homeowners, they didn't know necessarily to have multiple denominations of cashier's check to compete in the bidding process. They didn't even know necessarily that they'd be able to secure the funding necessary that an institutional investor might have been able to do this 45 day bidding procedure after the fact and really 15 days to give notice than 45 day to complete the bid. It gives some breathing room for individuals that actually meet these categories and want to move into the property. They get to do two things.
They get to avoid some of those disadvantages act the actual trustee sale, but also they don't have to engage in that competitive bidding process at the trustee sale. They can find a property that close at a decent value at a foreclosure sale and submit a bid after the fact. And at that point, they're not competing with investors anymore, they're only competing with other eligible bidders. So if as we look at these entity categories we'll kind of see how it's not as clear that this process makes as much sense. The first one does kind of fit within the eligible tenant by our perspective owner occupant. And it's been a nonprofit in which a eligible tenant by our perspective owner occupant is a voting member or owner of the nonprofit. And that makes sense. That's basically a situation in which an individual just uses their own nonprofit in order to purchase the property for themselves.
They're still required under the eligible tenant buyer certification or the prospective owner occupant certification to actually move onto the property. So we're still having an individual taking ownership, albeit in the name of their nonprofit, but controlling the ownership of the property on which they're actually moving on to. But then we have this next category, an eligible California nonprofit corporation whose primary activity is a development and preservation of affordable housing. What does that mean? What is a eligible California nonprofit? Namely, what requirements, formal requirements under California law, various areas of law, the tax law, the corporations code, what elements and filings need to be completed before they can be considered under this statute an eligible California nonprofit?
We've seen plenty of nonprofits created just for the purpose of taking advantage of these foreclosure sales. And it is not clear whether that's illegal, whether that makes them eligible or not. The next kind of vagueness we have here is whose primary activity is the development and preservation of affordable housing? What does it mean for their primary activity? Do they even ever have to had any transactions at all, whether regarding affordable housing or not? Can they simply, as we had just mentioned, just create this corporation for the purpose of these bids and claim, well, this is gon now our primary activity is affordable housing. That's what we're going to do down the line.
And what does affordable rental housing mean? That's another major question here, but notably, nothing in this definition requires the property to actually be used for affordable housing. It only requires the entity to be whose primary activity to be the business of affordable housing. So then we move on to that this next entity, which is a limited partnership or limited liability company in which the managing general partner or managing member is the definition under two, an eligible California nonprofit corporation. So all the problems that we just mentioned with respect to that second category of eligible entity, the nonprofit are existent here. In this case, the nonprofit is just the managing member, but there's another problem that's thrown on top of here, which is now this L L P or LLC, they're not even required to have a relationship with California beyond this managing member being related to California. So it's just another step removed from the situation of this ideal owner occupant or at least an entity providing affordable housing. There's again, nothing here that requires that the actual property being bid on actually be used for that purpose. And there's a few other categories of entity bidders that we don't need to focus on. A community land trust, a limited equity housing cooperative, and then various government entities.
So let's move on to what is an eligible bid? Eligible bidder must send a written notice of intent within 15 days after the trustee sale nand as of AB-175. That written notice of intent needs to be accompanied with an affidavit that we've been talking about identifying the category of eligible bidder to which the bitter ostensibly belongs and ominously. The statute also says the trustee may reasonably rely on this affidavit. There's formal requirements about when the bid must be received no later than 5:00 PM on the 45 day after the trustee sale. We don't need to get into the nitty gritty of the procedurals. We touched on that before. There are some special provisions or kind of exemptions that can truncate that post-sale window. The first is when you have eligible tenant buyers collectively bidding or bidding as a whole unit together there, there's a procedure by which A, they don't even need to exceed the bid at the trustee sale, they just need to match it.
But B, as soon as the eligible lieutenant bidder submit a collective bid that ends the window, they take priority over any other competing bidders. Another interesting nuance here is that the 45 day window can actually be avoided altogether if a prospective owner occupant is the highest bidder at the trustee sale and then that's it. That bitter is deemed the winning bidder and no 45 day window applies. And you can logically see why this is the case. If the whole point of this is that while at the trustee sale eligible bidders are disadvantaged because they're not institutional investors there's not a disadvantage if the eligible bid ends up winning at the actual sale. So in that case, there's no reason to apply a 45 day window. We already have our perspective owner occupant that won at the trustees of obviously if you are a prospective owner occupant or eligible tenant buyer this is the best way to do it. You avoid all of the problems that come up once we start looking at that 45 day window by just being a persp. Well, all the problems beyond outright fraud. But a lot of the problems that come up with the 45 day window. And just as a final kind of procedural note that p o must submit the affidavit to the trustee stating that they are p o o by five o'clock the next business day per the revisions in AB-175.
And so looking at AB-175, just real quickly we touched on what the big changes were and there really weren't a lot. Most of them were minor clarifications, but the first again, was that prospective owner occupant affidavit, if you are the winner at the trustee sale has to be delivered either at the auction or by 5:00 PM the next business day after the sale. And then the other big one was that a notice of intent to bid within the 15 day period need to also include the statutory affidavit identifying the category of authorized bidder. Because what we had before basically was certain cases where you have a notice of intent to bid that submitted but there's no affidavit submitted along with it on which the trustee can rely. So say the affidavit comes after that 15 day period, it's not clear to the trustee whether he has an eligible bidder situation or not at the 15 day mark.
So the question with the trustee was faced was, do I have to wait the whole 45 day periods? I got a notice of intent to bid, but there's nothing binding here. I don't have this affidavit under penalty of perjury, which I mean frankly, even that looks defective from a practical standpoint, what we're looking at. But the trustees did not even have that to rely on. And so AB SE 1 75 tried to tie up that end saying no, that affidavit also needs to be submitted within the 15 days. Because remember, if no eligible bids are submitted within the 15 days, then the highest bidder at the trustee sale that is the winner for investors. That that's really the only way now under SB tens 79 that you can become the prevailing winner at one of these foreclosure sales. So we mentioned there, there's some other procedural tweaks here. We'll circulate the slides, we don't really need to cover those in depth.
And again AB-175, a few more kind of just procedural tweaks to clarification. So what's in the statute. So let's kind of shift gears a little bit and let's about we, we've touched on them already, but the big problems that are endemic in these categories and this process that's been set up under SB-1079, particularly looking at them from a litigation perspective. The first one, almost a basic one is, does SB-1079 even apply? We talked about how the purpose of the statute is to promote owner occupancy and them moving into the properties rather than the properties going to institutional investors. To that end, SB-1079 is specifically limited to properties containing one to four residential units. If the property doesn't contain a residential unit SB-1079 should not apply. If the property whether that's commercial or doesn't contain a unit at all if it exceeds one to four residential unit, SB-1079 doesn't apply.
Again, the idea is that owner occupants are going to move on to the property. When you have properties that are beyond the one to four residential limit the statute makes less and less sense to apply as far as eligible tenant bidders. Some of the issues there that we'll see recurring, again with OS perspective owner occupants, eligible bidder at the time of the trustee sale is required to occupy the property as a primary residence. Well, what does it mean to be a primary residence and specifically for litigation? How is that proven or how is that disproven? Can it be disproven?
A similar issue on the evidentiary side at the time of the trustee sale, they have to have an arms length lease with the borrower. There's nothing here that requires that the eligible tenant buyer actually have that agreement in writing if they just have to say it's in place. So again, what evidentiary proof is required, you know, can obviously envision, he said she said type situations. And is it just a fact to go a fact for the jury to decide? And that's not clear and is not the borrower family member. Again, it's this idea of arm's length transaction for an eligible tenant, buyer prospective owner. Occupant carries a lot of those same issues.
The prospective owner occupant is required to provide an affidavit to the trustee. So actually one kind of interesting issue that I've seen is <laugh> the, there's an interesting way that the statute reads is that one section requires a PAO to give the affidavit to the trustee certifying to their category available bidder. But then there's another section that requires the trustee to obtain the affidavit. So is a cause of action created if the trustee fails to ask for that affidavit? Maybe not the prospective owner occupant has to occupy as a primary residence within 60 days after the trustees deem being recorded. What if the property can't be lived on with 60 days? We talked about how the code section says that the trustee may rely on the affidavit but what about when there's countervailing evidence to suggest otherwise specifically in a case where we know this property can't be inhabited with 60 days?
E, E Even T. Taking that a little bit further, what if you have a prospective owner occupant whose intent is to move on into the property within 60 days, but practically speaking, it's an impossibility that they actually could move on to the property within 60 days. They can. They still even qualify as a prospective owner occupant in that situation. And far more commonly what we're seeing now is just individuals claiming individuals that are investors claiming to be prospective owner occupants claiming that they're going to inhabit the property within 60 days but not actually doing it. The statute doesn't say that you actually have to follow through what the statute says is you have to intend to occupy the property within 60 days and you're attesting that under a penalty of perjury. So technically there is an argument of, well, I intended to, but my intent changed after the fact.
What circumstances are we going to say legitimize that sort of change? A And really what that means is what teeth, if any, does this affidavit of penalty under penalty of perjury even half? What makes it extremely problematic is that the way that it's set up again, from an evidentiary perspective, what we're trying to get at is somebody's intent and whether the intent was fraudulent. So as anyone that's a litigator knows, that's much tougher to prove. It's easy to allege and suffer and approve. This really is a situation where we've seen kind of this and obviously the entities too, but it is just, it's ripe it. It's ripe for fraud. It is really what it is because it's not clear that if you just turn around and put the property on the market, you win. Say you have a foreclosure sale the investors are all required to bid against each other and you know have investor B who comes in after the fact and he avoids having to have a competitive bidding process until their investors at the trustee sale.
He comes in after the fact and says, well, I'm an eligible bidder. I'm going to live on the property within 60 days if I win. Well, he's the only one that submits an eligible bidder bid after the fact. He completes it within 45 days. He gets the property within 30 days of receiving the property. He's got that property listed on the market. Does the investor who was the highest bidder at the trustee sale have a cause of action against that investor who basically stole the property by fraudulently but by committing a fraud on the trustee lying about his category of eligible bidder. Courts are not clear or we don't have clear guidance yet. Partly because the statutes are new, partly because the legislation is so vague. What would justify that winning post bid eligible bidder investor not following through on the certifications he made in this affidavit.
So moving on, the p O o also similar to the 60 day requirement also has a test that they're going to live on the property for at least a year. All the same questions. What justifies not staying on for a year? Obviously there's a lot that can change for people in a year. I mean, does this requirement have any teeth at all or do they just have to say, well, I intended and things change. It's not the borrower borrows family member and it's not the agents. So moving on really the p o O is one thing.
In that case, you have a more, even a more direct case of fraud. And even that one it's problematic because of the vagueness. But when you start looking at these entity categories that's when you really start to see the problems compound because it's not necessarily, it's one thing to say, I'm going to live on a property and then not do it. I mean that on its face looks a lot like fraud. These entity categories, these investors that are bidding under them it's not necessarily even an intent to defraud a lot of what these entity categories, these unscrupulous inventors that are kind of stretching the definitions are doing is trying to find loopholes and saying, yeah, that that's not what the statute, maybe that's not what the statute's for, but there's nothing in the statute that prevents me from doing this. So we talked about that one category of eligible California nonprofit whose primary activity is the development and preservation of affordable housing.
What's a California nonprofit? What filings have to be made in order to justify meeting this category? What does it mean for your primary activity to be developing and preserve preserving affordable housing? What history, if any, do you have to have in the field of affordable housing? What amount of transactions would justify actually falling into this category? And we kind of talked about the other kind of obvious issue here, <laugh> in that does the property even need to be used for affordable housing if you obtain it through this procedure? There's not necessarily anything that says it has to be. Well, there's definitely nothing that says it has to be.
And similar problem with the L L P or LLC situation. In that case, they're no longer even tied to California. They just have to have their managing general partner or managing member being eligible. California nonprofit whose primary activity is affordable housing. So now another step removed doesn't even have the California ties anymore. And you could see just with all the vagueness built into these definitions there's a lot of opportunities to simply just say that you meet the requirements with the weakness of the affidavit and the unwillingness of certain courts to enforce them because of the lack of clarity. You can see how these definitions are ripe for exploitation.
Okay, so we talked about litigation regarding the categories of eligible bidder and we've touched on litigation regarding the categories of eligible bids or regarding eligible bids. We talked about AB 75 kind of touched up on some of 'em specifically that affidavit must be sent within that 15 day period. But there's still, what does this affidavit mean when you swear under intent where you swear of your intent under penalty of perjury? What does that mean in the context of these foreclosure sales? CCP 2015 0.5 to find an affidavit and it talks about how it has to be under oath and basically signifying A, that's going to be under penalty of perjury, and B, it's going to be subject to the laws of California. So ostensibly, the reason that this affidavit requirements exist is to create, I mean basically if you don't follow through it's ostensibly a criminal fraudulent representation. And we'll get to that too when we talk about this next bill that's kind of circulating in the legislature right now.
But we, we'll talk about that in a bit. And then again, when the notice of intent bid has to be submitted within the 15 days a additional litigation surrounding this eligible bid kind of issue what happens when the trustee rejects the bid prior to the 45 day window expiring? So what happens when the trustee maybe makes a mistake if you are a prospective eligible bidder? Do you have to actually complete the bid in order to have a claim? At what point if there's a mistake in these SB-1079 bidding procedures is a cause of action created?
And we talked about, again, the trustee on the other end can rely on the affidavit. Are they required to? In what circumstances are they required not to? If it's clear maybe, or that there's a fraud being perpetrated by eligible bidder for whatever reason, or there's a high probability high suspicion that there's a fraud being perpetrated, can the trustee still rely on the affidavit then or are they required to reject those bids? Other things that we don't yet have answers to under this SB-1079 structure. And similarly, what are the causes of action? We talked about this hypothetical earlier. What are the causes of action for an investor that wins at the sale but loses the property post sale to these fraudulent categories of eligible bidders? Whether it's kind of the hypothetical that we talked about, whether it's someone who says they're a prospective owner occupant, but really they're just a real estate broker who's going to flip the property.
Or they're one of these categories of sophisticated investors that have set up nonprofits or LLCs in a clever kind of way to technically or maybe barely meet a loose definition of the statute, but in no ways furthering the purpose of the statute. What are the cause of action that are even created for that investor who was the winning bidder at the trustee sale? Is it a quiet title, action interference with prospective economic advantage? Is there a cause of action for violation of the statute? This is really an area where the legislature could help out us litigators by creating maybe a clear cause of action for violations here and clear penalties for doing it Twofold. In addition to giving the clarity it helps solve the issue with respect to the affidavit not having teeth in that there's a clear means of enforcing the kind of fraud, enforcing action against the kind of fraud that we're talking about.
Okay, so AB 1837 and this is interesting, this is the second attempt, now we're in the second year of SB-1079 being a thing. This is a second bite at the apple, so to speak, to address the problems that have been arising with SB-1079. And what's particularly interesting about it is that where we saw AB-175 make kind of minimal clarifications and some housekeeping tying up type of changes to SB-1079, 18 37 proposes some pretty significant changes to address the kind of primary issues that I've flagged here. It also carries a pretty interesting extension, so I'd only I've mentioned yet, but SB-1079 as it stands now is in effect from January until January 1st, 2026. So when to effect 2021 now, it's going to be in effect till 2026. AB 1837 proposes to extend that another five years till January 1st, 2031. Now that on his face, given everything I've told you, doesn't sound great, <laugh> given all the problems that we've seen arising, but we'll kind of get to why the thought process behind why they feel it. Maybe it needs to be extended at this point.
They're thinking about expanding the cat, what means to be an eligible tenant buyer. I mean that that's not a big change, but more, it's a slight expansion here to describe natural people who are occupying the property under rental or lease agreement with a mortgages or trusters predecessor and interest. But here the big changes, the bill would also revise the definitions of eligible nonprofit corporation and limited liability company for the purpose of making them eligible bidders. And along with those changes, the affidavit and declaration requirements are going to be expanded too to account for these new elements that need to be met. And there's a new requirement attached to the affordable housing as we'll See not only do the properties need to be used for affordable housing they need to be used for affordable housing for 30 years.
Another just kind of interesting note in the preface of this AV 1837 legislation is the mentioning that putting these new provisions expands the definition of a crime. The interesting part about that to me is that you have the legislature now acknowledging at least directly that the violation or that not fulfilling the elements of these affidavits that are submitted under penalty of perjury does constitute a crime. Maybe that is implicit in the, maybe that was previously implicit in what it means to signify something penalty of perjury. But we've definitely seen courts hesitate to hesitate to hold these, some potentially fraudulent bidders hold their feet to the fire, so to speak, when they don't live up to what's in the affidavit by making it clear that, hey, this is criminal I think lands some force and lends some weight behind what the legislature's trying to do to make that affidavit really mean something in this context. So make sure that these winning eligible bidders are actually who they say they are.
So if we take a look at what the changes to the entity bidders are the first very interesting thing here, a nonprofit association, nonprofit corporation or cooperative corporation in which eligible tenant buyer is a voting member or director. We talked about that one. The interesting part there is that it's no longer just a perspective owner, A prospective owner occupant could have fallen into this category before they've removed the perspective owner occupant. So not even a P O O gets to buy it in the name of his nonprofit. In this case it's only eligible tenant buyer. But when we move on to section D is really where we see some interesting changes. Eligible non-profit corporation with all of the following attributes, a determination letter from the IRS affirming tax exempt status your principle place of business in California, the primary residences of all board members locating California's and one of your primary activities being in the development and preservation of affordable housing.
So we, we've done away with the prior definition where it just said a nonprofit whose primary bus, an eligible California nonprofit whose primary business is affordable housing. Now you have to have an eligible tenant buyer as a voting member or director or sorry, you don't have to have that, but you have to meet the specific requirements for an eligible nonprofit corporation that are specifically laid out. It has to be recognized by the irs. You have to have a principal place of business in California. All the board members have to have a primary residence in California. Whereas the nonprofits under the existing system just need to vaguely claim that they're in business affordable housing. We have and they're eligible California nonprofits here. We have more specific requirements to ensure that the property actually gets used for affordable housing. And we'll see there's a second component to that that's built into the bill later on.
And then the second category, we talked about the non-profit that would qualify a limited liability company wholly owned by one or more eligible non-profit corporations as described in paragraph C or D. So D what we just talked about the nonprofit corporation that meets these California requirements and the, I guess the bigger hook here is this other section which reads on and after January 1st, 2023 in the case of any real property purchase pursuant to 29 24 M, that's the bidding process that we're talking about by an eligible bidder described in subparagraph C two G. So those sub paragraphs, that's what we're talking about here is this type of nonprofit with an eligible tenant buyer, one of these eligible nonprofits with ties to California that have activities in affordable housing or an LLC wholly owned by one of these types of corporations. And one thing I might have glossed over too, that's a change here.
The LLC has to be wholly owned, whereas under the prior definition, the LLC only needs to have its managing member being a California nonprofit. Now we're saying no has to be wholly owned by one of these eligible California nonprofits. And it says C, the G C D E G G is, it's not a substantial category for our purposes here, but the key is that any eligible bidder described in one of those categories that we just talked about that obtains a property through a foreclosure needs to keep the property as affordable housing for a minimum of 30 years. So two things, not only do we have this 30 year requirement being imposed, but now the properties that are being acquired by the entities through the foreclosure sale had to actually be used for affordable housing.
We kind of touched on it, but this tries to close the loophole there where they only need to be in the business of affordable housing. Not clear what that means. And there was no requirement in the past or under our existing scheme, I should say that the specific property be used for affordable housing. So I just wanted to touch on, again, the biggest issue with SB-1079 that we're looking at here is the lack of enforceability with these affidavits. Do they have any teeth? Are judges willing to hold the eligible bidders to what's in the affidavit the evidentiary issues surrounding the intent? We could definitely use more than just, well, they change their intent. We need clearer direction on what circumstances justify not following through with what's in those affidavits. And then the next one, which we looked at length there, AB 1837 tries to address at least is the nebulous nature of these entity eligible bidder categories and what does it mean as far as their primary business being affordable housing and how that can be exploited to incentivize fraud. So going forward, AB 1837 is going to be something interesting to watch because it would at the very least dramatically change the process of some of these investors claiming to be entities that qualify essentially perpetrating a fraud. So with that said I'm happy to answer any questions if you give me a second here.
Oh, it looks like we don't have any questions, so you guys are welcome to submit them if you'd like and I'd be happy to answer Yes, the recording will be shared and it will also be distributing the slides as well after this.
Who owns and has access and responsibility to property after initial foreclosure sale and before the end of 45 days? That's another good question that we've currently seen issues arising before the courts. Really? Yeah, I, it's a good question, especially when you have issues with these foreclosure properties where they're abandoned and there's all kinds of other related issues. It's another one that we don't have a clear answer on but we've definitely seen it coming up. Is the payment to the lender held for the 45 day period? Yes it is going to be held for that 45 day period, assuming that the foreclosure sale actually goes for that 45 day period. We kind of touched on that. There's a couple of ways via that sale can be truncated. The clearest one would be if there is an eligible tenant buyer group that submits a unified bid, that would end the sale. And then beyond that the only other reason I could think is maybe within a 15 day period there was a notice of intent to bid or something that they never actually perfected the bid. So the trustee still rejects it. In that case, maybe the window closes sooner as well.
Are eligible bidders competing under the eligible bid process? Yeah, and generally there's kind of a hierarchy of priority. We talked about how eligible tenanted buyers kind of have some special advantages and perspective owner occupants as well just need to match the bid at the trustees or just $1 over the bid at the trustee sale. But yeah, I mean, once you're into that bidding window, unless you're an eligible tenant buyer you are competing against all the other categories of eligible bidder. How often are there eligible bidders on foreclosure sales? I can't really answer that. I mean, look, we're on litigation, so we see 'em every time it comes to us. That means that there's been a problem. I can tell you that I get multiple calls a week on these issues of people that are upset with Nancy Skinner <laugh> about this bill. So there's definitely a lot of 'em out there. I can definitely tell you that if there are multiple eligible bidders, how are their bids managed and prioritized? Do the trustee hold a second auction on the 45th day? No, no. There is no second auction it. It's basically whoever's the highest again, subject to that eligible tenant buyer category where they submit a unified bid everybody else is competing against each other as an eligible buyer, an eligible bidder. So whoever is the highest bidder, that's the one that's going to win.
If a four-unit property is foreclosed upon and one tenant submit a letter of intent, would they be eligible to buy the property? Yes. Yeah. Yes, they would. And also, this was a clarification that AB-175 kind of brought up, which is I think there was a situation in which you had one eligible tenant buyer submit a bid then the other ones find out about it, and after the fact, they all decide they want to submit a bid together rather than compete against each other. And because the one had submit the notice of intent within the 15 day window, all of them were permitted to collectively buy the property and take advantage of that kind of prioritization for an eligible tenant buyer. So yes, the answer would be yes.
Oh, so I got some interesting input here just to respond to the question about how often are we seeing this? To answer the question you just received, we are seeing intent to bid notices on absolutely every property one at trustees sale at this point. We are seeing the intent to bid itself being used maliciously as investors put in notices on all of their competitor's properties just to tie up their funds for a month and a half on every transaction. Very few of these are actually consummated by the eligible bidder. Yeah, I mean, that's an interesting issue too. So now to add some input to that, now they're avoiding even having to submit a notice of a affidavit under penalty of perjury. You're avoiding that affidavit and you're essentially exploiting the process not to gain control of the property, but to disadvantage your competitors unfair business practices essentially.
So bids are sealed. There's nothing in the statute that specifically says bids are sealed. I've heard from trustees that have communicated what the other bids were to pot, other potential bidders and trustees that haven't. My thoughts would be, you want to you, you'd want just any auction, you want to get the highest price. So I wouldn't see a huge disadvantage from a trustee communicating what other eligible bids have come in. Basically, as we mentioned, the highest bidder is the one that's going to win. So by communicating as a trustee what eligible, other eligible bids you received you're just driving up the price. But no, there's nothing in there that requires that the bids be sealed. Okay. You guys feel free to continue to send any other questions. We'll go through them and we can respond via email. But yeah, I mean it's 12 o'clock. We thank you for your time. We appreciate all the questions. Appreciate you guys showing up. Like I said, we'll be circulating the slides. My contact information is on there as well. Feel free to reach out to me, j.perez@Geracillp.com. Thank you.
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