If you want to be a real estate developer in the State of California, there are certain legal obligations you must fulfil, not following which would lead in penalty. These legal obligations are related to licenses, permissions, workmen compensation, etc. and form the main topic of this Article.
In this article, I will be discussing in detail, the laws which a real estate developer in California must be aware of so, if you are an existing or prospective real estate developer then go through the whole article.
License for being a real estate developer
California, just like various other states in the United States, has licensing requirements for individuals who want to earn a living in the real estate development business. To be a real estate developer, you must get a contractor license for the trade.
The procedural requirements, legalities and allied information in relation to the license has been discussed below –
What is Contractor’s license?
A contractor’s license is a license issue by the Contractors State License Board under the Department of Consumer Affairs, California. The contractor business has been broadly classified into three types as has been defined under Section 7055 of the Division 3, Chapter 9, Article 4 of the Business and Professions Code.
The three types of contractors are –
#1. General Engineering Contractor –
Such types of contractors are engaged in such field which require certain engineering knowledge and skills.
As has been provided under Section 7056 of the Division 3, Chapter 9, Article 4 of the Business and Professions Code, these contractors shall work in areas relating to the irrigation, drainage, water power, water supply, flood control, inland waterways, harbors, docks and wharves, shipyards and ports, dams and hydroelectric projects, levees, river control and reclamation works, railroads, highways, streets and roads, tunnels, airports and airways, sewers and sewage disposal plants and systems, waste reduction plants, bridges, overpasses, underpasses and other similar works, pipelines and other systems for the transmission of petroleum and other liquid or gaseous substances, parks, playgrounds and other recreational works, refineries, chemical plants and similar industrial plants requiring specialized engineering knowledge and skill, powerhouses, power plants and other utility plants and installations, mines and metallurgical plants, land leveling and earthmoving projects, excavating, grading, trenching, paving and surfacing work and cement and concrete works in connection with the above mentioned fixed works.
#2. General Building Contractor –
Such types of contractors are engaged in contracting business, which is in connection to any structure built, being built, or to be built, for the support, shelter, and enclosure of persons, animals, chattels, or movable property of any kind. Such construction shall include at least two unrelated building trades and crafts, as has been provided under Section 7057 of the Division 3, Chapter 9, Article 4 of the Business and Professions Code.
A specialty contractor is a contractor whose operations are related to construction work requiring special skill and whose principal contracting business involves the use of specialized building trades or crafts.
At present, there are 42 types of speciality contractors, few of them being, Insulation and Acoustical Contractor, Concrete Contractor, Drywall Contractor, Electrical Contractor, etc.
The types of contractors who are engaged in real estate development are either General Engineering Contractor or the General Building Contractor.
The former is engaged in specific fields which are usually related to public utility services, while the latter is engaged in general activities which include residential construction work.
Pre-requisites for applying for a Contractor’s license in California
As was discussed earlier, if you are interested in being a real estate developer in the State of California, you must have a contractor license issued by the Contractors State License Board, California. For getting the license, you must fulfil the following requirements –
- You must be 18 years of age or older.
- You must have an experience of 4 years as a journeyman, foreman or supervising employee, an out-of-state licensed contractor or as an owner-builder, within the last 10 years.
The requirement of experience could be substituted by a degree in the manner mentioned below –
- A credit of up to 1.5 years for holding an Associate of Arts degree from an accredited institution.
- A credit of up to two years for holding a four-year degree in economics, business, maths, physics or degrees related to trades or crafts related to construction.
- A credit of up to three years for holding a certificate of completion of apprenticeship in a contracting related field.
- Must possess California business license and Tax ID, in case the contractor is a limited liability company or corporation.
Procedure for getting the license
The step by step procedure of getting the license is as follows –
- Application Process – Individuals, partnerships, Limited Liability Company and corporations shall submit an application to the Contractor’s State License Board, California through mail.
The application shall contain the following –
- Basic Information – full name of the business, address, type of classification required (A or B, as was discussed above) and the type of business organisation.
- Bonds – A contractor’s bond of $15,000.
Additional requirements for an LLC are as follows –
- A limited liability company shall file a surety bond of $100,000.
- A limited liability company is also required to carry a minimum insurance of $1 million for licensees with five or fewer members as personnel of record. An additional $100,000 for every additional personnel of record, not exceeding $5 million.
- Examination Process – After submission of the application, you will be made to take an examination conducted by the Contractor’s State License Board, California. The examination would be three and a half hour long and will be conducted through a computer assisted testing system. The syllabus of the examination has been provided by the Contractor’s State License Board, California and can be accessed here.
Upon passing the examination, you will be given your license in about a week by the Contractor’s State License Board.
Permits required for real estate developers in California
A contractor’s license is the most basic requirement for a real estate developer. There are various other permits which a real estate developer would need for developing a project. The permits are described as follows –
Registration with the Secretary of State, California
When starting a new business, it is essential to register the same at the Secretary of State, California. For the purpose of registering your business with the Secretary of State, California, you must contact the California Business Investment Services unit of the Governor’s Office of Economic Development, who would guide you with the subsequent procedure.
A sales permit is required by those individuals, partnerships, limited liability companies and corporations, which intend to lease or sell any tangible property that would ordinarily be subject to sales tax. The permit is issued by the California Department of Tax and Fee Administration. You can apply for Sales Permit online for free by clicking here.
Business Tax Certificate
In the state of California, no matter what kind of business you are engaged in, you will need a business tax certificate, which is usually also called as business license.
The license is issued by the Department of Finance of the particular city and there may be some additional regulations in relation to the business tax certificate as the local government deems necessary.
Employer Identification Number (EIN)
It is essential for you to possess an Employer Identification Number if you employ one or more employees in your business.
The number is issued by the Employment Development Department (EDD), California. You can register online for getting an Employer Identification Number on the website of Employment Development Department, California by clicking here.
Fictitious Business Name
In case your business utilises a name, which is not the legal name of the individual owners or the corporate entity superordinate to the business, such name is considered to be a fictitious business name and has to be registered with the clerk/recorder/assessor of the county.
Laws in relation to Fictitious Business Name could be found under Sections 17900 to 17930 of the California Business and Professions Code.
However, it is advisable that you incorporate your business as a Limited Liability Company before starting out. This is because it limits your liability in case your business goes south.
However, keep in mind that choosing the right business legal structure is key before entering into any form of real estate business as a developer.
In case your business is not hiring another sub-contractor for deciding on architectural and this work is performed by your business organisation itself, then you must need an Architectural License from the California Architects Board, Department of Consumer Affairs, California.
Land use and zoning clearance
While deciding the place for a project, you must ensure that the place falls under the adequate zone or not.
The function of zoning clearance is to verify that a proposed structure or land use is allowed in the applicable zoning district, and that the project complies with all applicable requirements of the Development Code.
Zoning clearance is issued by the Planning Department of the city and the procedure of obtaining the same could vary between different cities.
Usually, the documents which are required to be presented before the planning department include site plan, floor plans, and elevations; showing the existing and proposed buildings and uses on the property.
Building and Construction permit
A building and construction permit is required from the city’s building department for any construction for ensuring a safe, accessible, healthy and efficient environment for human occupancy and habitation. California Code of Regulations, Title 24, Building Standards Code require that no building or structure may be erected, constructed, enlarged, altered, repaired, moved, improved, removed, converted or demolished unless a separate permit for each building or structure has been issued.
In general, improvements, replacements, and repairs require permits.
Fire Prevention and Inspection permit
As has been provided under Section 105 of the California Fire Code of 2016, there shall be inspection of the new construction by a fire prevention officer who will then certify that the place is in conformity to the California Health and Safety Code and the California Fire Code.
Authority to Construct from South Coast AQMD
In case the proposed project lies in the South Coast Air Basin in Southern California, a special permit is required to be taken from the South Coast Air Quality Management District (South Coast AQMD), Diamond Bar, California.
The purpose of the South Coast AQMD is to implement the requirements of the Federal and State Clean Air Act, the Air Quality Management Plan (AQMP) and air quality rules and regulations by specifying operating and compliance requirements for stationary sources that emit air contaminants.
In order to comply with federal and state Clean Air Act requirements, all major and non-major sources in South Coast Air Basin are subject to “no net emission increase”.
For applying for the authority to construct, the applicant shall submit Form 400A, Form 400-CEQA and a supplemental Form 400-E-xx and list all kinds of equipment which would be used in the construction process.
The list of equipment with their respective forms could be found here.
Construction Activities Storm Water General Permit
In case, the discharges from your construction site disturbs an area of 1 acre or more, you world require the Construction Activities Storm Water General Permit from the United States Environmental Protection Agency.
At the time of rain, water washes the loose soil of the construction site along with various materials being stored there. As the water flows off the site, it can help in the spread of pollutants like chemicals, sediments and debris from the loose soil and it could enter storm sewer systems or go directly into lakes, rivers or coastal powers.
The purpose of the Construction Activities Storm Water General Permit is to allow the Environmental Protection Agency (EPA) to work with the construction business and ensure that the construction site has proper stormwater controls. Doing this, the EPA aims to protect the surrounding environment and keep community’s water clean.
Some Basic Employment Rules That You Should Read
Compliance with California Wage and Labour Laws
As an employer, you must ensure that you comply with the wage and labour laws of the state of California for preventing a potential lawsuit from your employees. There are certain limits in relation to minimum wage, work hours, etc. which are to be fulfilled. Such limitations and regulations are discussed below –
Minimum Wage –
The minimum wages in the state of California are fixed hourly. As in effect from 1st Jan 2020, the minimum wages to be paid by employers with 26 or more employees is $13 per hour, whereas for employers with 25 or fewer employees, it’s $12 per hour, as has been provided under Section 1182.12 of the California Labor Code.
The labour laws of the state of California require an employer to pay overtime to employees, at the rate of:
- One and one-half times the employee’s regular rate of pay for all hours worked in excess of eight hours up to and including 12 hours in any workday, and for the first eight hours worked on the seventh consecutive day of work in a workweek; and
- Double the employee’s regular rate of pay for all hours worked in excess of 12 hours in any workday and for all hours worked in excess of eight on the seventh consecutive day of work in a workweek.
The above schedule of rates has been provided by the Department of Industrial Affairs, California. Make sure that the contract that you draft, complies with these regulations. We, at WinSavvy, assist startups in drafting their contracts. So, if you have any questions or need help, let us know!
Meals and Breaks –
As has been provided under the California Labor Laws, the employers must provide employees with a meal period of not less than 30 mins if they work for five consecutive hours.
Unless the employee is relieved of all duties during the entire 30-minute meal period and is free to leave the employer’s premises, the meal period must be counted as hours worked and paid at the employee’s regular rate of pay.
The laws relating to meal period and break are provided by the Department of Industrial Relations, California.
There may be required, other permits and licences as may have been prescribed by the local government or the state government over time.
Further keep an eye out for any development relating to employee rights relating to COVID-19 in your district.
Compliance to Discrimination Law
The Department of Fair Employment and Housing, California has made it illegal for any employer to discriminate against a job applicant or employee on the basis of race, color
Ancestry, national origin, religion, creed, age (over 40), disability, mental and physical, sex, gender (including pregnancy, childbirth, breastfeeding or related medical conditions), sexual orientation, gender identity, gender expression, medical condition, genetic, information, marital status, military or veteran status.
The Fair Employment and Housing Act (FEHA) applies to public and private employers, labor organizations and employment agencies. It is illegal for employers of five or more employees to discriminate against job applicants and employees because of a protected category, or retaliate against them because they have asserted their rights under the law.
The FEHA prohibits harassment based on a protected category against an employee, an applicant, an unpaid intern or volunteer, or a contractor.
Harassment is prohibited in all workplaces, even those with fewer than five employees.
Being a real estate developer is a lucrative business opportunity but it comes with its share of procedural difficulties and complications. It would require serious dedication and hefty investments if you are looking to be one.
In case of real estate development business, it sure looks overwhelming but the opportunities in this particular field outweigh the potential risks that you may face.
Have any questions or need any help? Then drop a comment or book a free consultation with us.