A California Chamber of Commerce job killer bill that would have exacerbated the state’s housing shortage, raised residential housing prices across the board, and eliminated tens of thousands of housing production-related jobs is likely dead for the year.
The bill, AB 2230 (Bennett; D-Ventura), substantially shuts down the production of housing in California by blocking the inflow of crucial capital that nearly all housing production relies on.
The Cartwright Act already protects against price fixing so expanding it as contemplated by this bill is unnecessary and will have the unintended consequence of making any return on investment a crime.
In a letter sent to legislators last week, the CalChamber pointed out that while well-intentioned, AB 2230 fundamentally misunderstands the challenges facing California’s housing market by deterring critical investment in the production of housing and complicating an already-challenging regulatory environment.
The production of housing is a capital-intensive business. By expanding California’s Cartwright Act, as conceived by the bill, AB 2230 will significantly risk halting the inflow of crucial capital that nearly all housing production, save for the projects self-financed by the ultra-wealthy, rely upon.
In doing so, AB 2230 not only hinders efforts to address California’s acute affordability crisis, but also undermines the economic stability and growth of all local communities statewide.
Under AB 2230, a private party or the Attorney General may bring an action against, in this case, a developer or property manager, and any violation of the Cartwright Act, California’s anti-trust law, would subject the defendant to treble damages.
Among the newly created causes of action that are a violation of the law is simply owning more than one thousand units of housing in a “geographic area.” Arbitrarily applying to the housing sector the daunting enforcement mechanisms developed over decades to combat unlawful trusts is a new and extraordinary threat that will chill new activity in this sector.
Capital Essential for Home Building
Building homes requires a significant upfront investment. This includes purchasing land, securing permits, paying for materials, labor, and often the costs of infrastructure improvements and other impact fees like roads, utilities, schools and more, the CalChamber explained.
Capital is needed to cover these expenses long before any revenue from selling or renting the homes is realized by the home builder. Home building projects often span months or even years. Adequate capital ensures that home builders can manage cash flow effectively throughout the construction phase, meeting ongoing expenses until the project is completed and begins to generate income, which most often takes several years, sometimes decades.
Access to capital allows home builders to work on multiple projects simultaneously, expand their operations, and take advantage of economies of scale. This scalability can lead to more efficient production in California, which leads to more homes being built at a faster pace at lower costs.
Further, as the Great Recession revealed, the real estate market is not immune to economic downturns. Adequate capital allows home builders to weather these downturns, maintain their operations, retain staff and continue building much-needed homes.
AB 2230 also jeopardizes investments in new home building construction technologies, sustainable building practices, and innovative materials. Capital is utilized for research and development that California should incentivize to create better quality and more sustainable homes that utilize the more efficient construction processes, the CalChamber stressed.
Like any business, home building is not without great financial risks. Construction projects can have unforeseeable delays, cost overruns, labor or product shortages and market changes that can quash the production of housing in California.
Adequate capital reserves allow home builders to manage these risks without compromising the housing project’s completion or quality. Home builders often rely on a mix of equity, loans, and other financing options to fund housing projects in California.
Capital strength improves their borrowing terms and access to various financing sources, ensuring that projects are not halted due to funding constraints and that the best interest rates are secured. In turn, this leads to lower costs for the production of housing in California, the CalChamber said in its letter.
“Capital is critical, not just for the physical act of building homes, but also for ensuring the financial viability and sustainability of home building operations that is vital for the long-term success of California’s housing market and the state’s economic growth,” the CalChamber stated.
Signs that AB 2230 is unlikely to advance this year include: an April 17 policy hearing in the Assembly Judiciary Committee was canceled at the author’s request, and AB 2230 was not on the schedule for the April 23 committee meeting, the last one before the April 26 deadline for bills with fiscal impacts to be sent to the Assembly Appropriations Committee for consideration.
