By Sabrina D. Johnson & Talon J. Powers
February 24, 2023
On September 29, 2022, Governor Newsom signed SB 1439, a bill which will have a profound effect on individuals, companies, and their representatives (including their attorneys, engineers, consultants, architects, and other advisors) in the real estate industry’s ability to make campaign contributions to local officials and candidates—resulting in a potential “trap” for the unwary.
As of January 1, 2023, any elected official of a local government agency who, within the last 12 months, has accepted, solicited, or directed a campaign contribution of more than $250 from any “party” must recuse themselves from voting on any license, permit, or other entitlement sought by such party. The recusal requirement also applies to any donations made to any official within 12 months after the final decision of a proceeding. The law applies to any contributions made from January 1, 2023 forward—it does not apply retroactively to contributions made in 2022.
Critically, “party” does not just mean the business entity itself—under the law, otherwise separate donations will be considered “aggregated” with the party’s for purposes of meeting the $250 threshold for recusal of the local official under a variety of circumstances. Aggregated donations result in the “trap” for the unwary, potentially resulting in a worst-case scenario—where multiple otherwise favorable elected officials must recuse themselves from voting on approvals for development projects or permits.
Practically speaking, this means real estate development businesses and their principals must be much more careful with making campaign donations, to avoid inadvertently causing elected officials of local government agencies to have to recuse themselves from proceedings involving these businesses (including, for example, a hearing in front of a planning commission for a new development or project). Specifically, businesses and principals should be aware of the following rules, and take care not to run afoul of them:
- Closed Corporations: Where the party or participant is a corporation, any donations from the corporation’s majority shareholder will be aggregated with the corporation’s. This means that any person who is a majority shareholder in multiple companies should be careful making donations to elected officials, because their donation will be aggregated with any donations from all such companies.
- “Agents”: Any individual with a corporation who “represents the party, or participant, in connection with the proceeding” (i.e., who actively participates in the process—including an attorney representing the party) is considered an “agent,” and their donation will be aggregated with the party and/or majority shareholder’s donation. Similarly, the individual within the corporation who signs the application for the matter/project will be considered an “agent” and any donation from that individual will be aggregated with the corporation’s.
- For example: assume Sandra, an employee of Development Corporation (“DevCorp”), is spearheading a development project on behalf of DevCorp. DevCorp’s majority shareholder is another individual, Francisco. Under these circumstances, any donation by Sandra (the “agent”) and Francisco (the majority shareholder) will be aggregated both with one another, and also with any donation by DevCorp. Even further—assume that both the architect for DevCorp’s project, Lauren, and the land use attorney for DevCorp, Arnold, also made respective donations to elected officials. These donations would also be aggregated with DevCorp’s (and/or Sandra and Francisco’s) donations. If these parties donate more than a collective total of $250 to any elected official, that elected official would have to recuse themselves from any hearing taking place in front of the official on behalf of DevCorp. In fact, DevCorp, the applicant, could make no donations itself, but still experience recusals from the local agency because of the aggregated donations.
- Other Entity Types: Though the statute is silent as to the majority owners of other entity types (i.e., LLCs or partnerships), it is reasonable to assume that many localities will apply similar rules across the board. Regardless, the same aggregation rules would apply for individuals who act as agents (i.e., actively participate in the proceeding, and/or who sign the application for the entity in the applicable proceeding [as explained above]).
- Further, if one individual, or a majority of the same individuals, “directs and controls” the contributions of two or more persons, the contributions of all will be aggregated. Thus, if individuals within a company are making donations at the direction of the owners, such donations will be aggregated with the individuals directing or controlling such donations.
- Aggregation of Multiple Entities: Any contribution by a party to a proceeding will be aggregated with any contributions made by the party’s “parent, subsidiary, or otherwise related business entity.” An “otherwise related business entity” is one where an entity owns a controlling ownership interest in the other entity, where the two entities share management and control, and/or where the controlling owner in one entity (i.e., 50% or greater interest) is also a controlling owner in the other entity.
- This rule specifically will have a significant impact on donations from various entities ultimately under other businesses’ control. Although the entities may be structured in such a way that there is no “controlling” (i.e., majority) ownership, they will still nevertheless be considered related entities if they share addresses, employees, owners and managers, funds, and/or if there is a regular and close working relationship (for example, if one company is the manager of another company). Further, any individual who is a controlling (majority) owner in any company will have his/her donations aggregated with any such company’s donations.
- Businesses must therefore be careful that they do not exceed the donation threshold by virtue of other donations from “related business entities.”
The Constitutionality of SB 1439
The constitutionality of SB 1439 is highly questionable, and has already been challenged. Of course, the outcome of such litigation is uncertain. For the time being, one should not rely on SB 1439 getting overturned, and in an abundance of caution, everyone should proceed as though it will be fully in force unless and until it is successfully challenged. Companies must monitor campaign donations to local government officials accordingly.
Anyone in the real estate industry should be aware of the potential pitfalls of this new bill, and carefully monitor donations to local elected officials accordingly. For assistance with analyzing the consequences of potential campaign donations to local elected officials, or with any questions, please contact Talon J. Powers or Sabrina D. Johnson with Hecht Solberg at (619) 239-3444.