Posted on: March 22, 2026
Updated for 2026 Legislative Session
California Assembly Bill 1406 (AB 1406) is pending legislation that could impact how purchaser deposits are handled in certain real estate transactions involving 10+ units. While earlier versions of the bill proposed major changes to subdivision escrow practices, the bill has since been narrowed significantly.
As of now, AB 1406 is not law. However, it is important for developers, contractors, and real estate professionals to understand both:
[00:00] California AB 1406 could impact how real estate projects are financed—but most people are misunderstanding what it actually does.
[00:08] Here’s the reality.
[00:10] AB 1406 is not law yet. It has passed the Assembly and is now in the Senate, but nothing has changed legally today.
[00:19] Earlier versions of the bill were a big deal.
[00:22] They would have allowed developers to use buyer deposits held in escrow to fund construction—but only if they provided a completion bond or performance bond covering one hundred percent of construction costs.
[00:36] That would have shifted major risk into the surety market.
[00:40] But that version is gone.
[00:42] The current version is much narrower.
[00:45] It focuses on new condominium sales and increases the liquidated damages cap from three percent up to six percent of the purchase price.
[00:55] What does that mean?
[00:57] Developers may have better financing terms—but buyers take on more risk if a deal falls through.
[01:04] And importantly—escrow protections remain in place. Buyer deposits still cannot be used for construction.
[01:11] Bottom line: AB 1406 isn’t changing bonding requirements today—but it signals where California may be heading next.
[01:20] If you’re a developer or contractor, this is a bill you need to watch closely.
[01:25] If you need help with bonds or project compliance, request your quote now at SuretyFirst.com.
This means no current legal requirements have changed.
California currently has a housing shortage of around 2.5 million units that needs to be built in the next few years. These housing units are typically filled through a mix of single family and multi-family units. Multifamily condo construction differs significantly in how developers obtain financing as opposed to single family construction. Lenders often require greater security and capital for construction including full, upfront financing and in light of persistently high interest rates, the ability to obtain these loans has become increasingly difficult.
To show lenders buyer interest in a proposed project (and the ability to repay loans upon project completion), developers collect deposits from interested buyers. The forfeiture amount of deposits had been capped at 3%, a consumer friendly law amongst the lowest in the nation. AB1406, as proposed, suggests increasing the liquidated damages of a condo deposit (10+ units) forfeiture from 3% to 6%, allowing for lower perceived risks to lenders and potentially, more condo construction in California to fill the housing shortage void.
Proponents say this will increase housing supply, leading to more housing and potentially less home price inflation through supply and demand market mechanisms.
Opponents say this could lead to buyers losing significantly more deposits, weakens consumer protections and increases financial risk to buyers.
Example:
Current:
Proposed:
Earlier drafts of AB 1406 introduced a significant change to subdivision development financing.
The bill would have:
To protect buyers, the bill required strict conditions before any funds could be released:
Developers would have been required to provide financial security such as:
In an amount equal to:
This requirement was critical because it shifted risk away from the buyer and ensured project completion.
The bill has since been significantly narrowed.
The current version of AB 1406:
In its current form, the bill does NOT allow developers to use escrowed deposits to fund construction.
| Topic | Earlier Version | Current Version |
|---|---|---|
| Use of buyer deposits | Allowed for construction (with conditions) | NOT allowed (Escrow remains protected) |
| Bond requirement | Required completion/performance bond | Not required (as deposits stay in escrow) |
| Primary focus | Subdivision financing | Condo sales & lender risk reduction |
| Escrow handling | Conditional early release | Remains protected |
Even in its narrowed form, AB 1406 still has implications for:
If passed, the bill would:
However:
The proposed increase in liquidated damages means:
This increases financial exposure if a transaction fails.
Although the current version does not center on bonding, the earlier version is still important context.
If similar legislation re-emerges in the future:
This is a critical trend to watch in California development law.
The original version raised concerns about:
Industry groups and regulators pushed back on:
As a result, the bill was revised into a narrower form focused on:
Because this is pending legislation, it can still:
California AB 1406 started as a proposal that could have fundamentally changed how subdivision projects are financed by allowing early use of purchaser deposits backed by completion bonds.
However, the bill has been significantly narrowed. In its current form, it focuses on increasing the liquidated damages cap in certain new condominium sales while maintaining escrow protections.
For developers and contractors, the biggest takeaway is not what the bill does today—but what it signals:
California is actively exploring ways to restructure development financing and risk allocation.
That makes AB 1406 an important piece of legislation to watch closely as it moves through the Senate.
No. AB 1406 is pending legislation and has not been enacted into law. As of the latest update, it passed the Assembly and was referred to the Senate Rules Committee for assignment.
Earlier versions of AB 1406 would have allowed certain purchaser deposits held in escrow for subdivision lots or parcels to be disbursed before closing for construction and related project costs, subject to strict conditions and financial security requirements.
In the earlier version, yes. The bill would have required satisfactory evidence of security for completion of construction, which could include a completion or performance bond equal to 100% of construction cost or the percentage of construction remaining.
No. The current version has been narrowed and maintains escrow protections and the general prohibition on using purchaser deposits to finance construction and related project costs.
The current version focuses on newly constructed attached condominium sales and would increase the liquidated damages cap from 3% to 6% in qualifying transactions if passed.
Depending on the final version, AB 1406 could affect developers, buyers, lenders, escrow stakeholders, and potentially surety or bond-related risk structures tied to project completion.
The bill matters because it reflects how California may approach project financing, purchaser deposit protections, and risk allocation in future real estate and development transactions.
No. Because AB 1406 is still pending, buyers and developers should not assume the bill is final or adjust legal or financial decisions without confirming the current legislative text and status.
Reviewed by: Jeremy Schaedler
Principal – Surety First Insurance Services
As principal at Surety First, Jeremy Schaedler has specialized in contractor license bonds and construction insurance since 2006. CA License: 0f06277
This information is for general informational purposes only and does not constitute legal advice. Licensing and insurance requirements may change. Contractors should verify current requirements directly with their state regulatory agency or consult qualified legal counsel.
Phone: 1-800-682-1552
Website: suretyfirst.com
This bill deals with liquidated damages in new condominium sales and has seen significant changes in its 2026 session.
Official Bill Text & Status: California Legislative Information – AB 1406
Legislative History: LegiScan – CA AB 1406
Note: This source confirms the Assembly passed the bill on January 29, 2026, and it has moved to the Senate.
Detailed Analysis: Assembly Third Reading Analysis (PDF)
Note: This document details the shift from the originally proposed 10% cap to the current 6% cap and the removal of the earlier escrow disbursement language.
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