Somebody Paid $3.7 Million Cash for CA Gov Newsom's Estate - But Who?

Santiago Mejia/San Francisco Chronicle via AP, Pool, File

Somebody paid $3.7 million cash, through an LLC, for a 12,663 square foot, 8-acre estate in December 2018 that was then transferred (or gifted) to California Gov. Gavin Newsom and his wife shortly before the First Couple obtained a $2.7 million cashout mortgage loan on the property. A year after originally breaking that story we still don’t know who that somebody is and whether the transaction was legal or not. Newsom’s spokesperson, Nathan Click, has given two diametrically opposed explanations as to the origin of the cash, and neither holds up to scrutiny.

The compound, located along the American River in the Sacramento suburbs, features a wine cave, tennis courts, a pool, and a pool house. In the photo in Gavin Newsom’s tweet below, the couple is lounging by the pool.

At a press conference in January 2019, Click said that the Newsoms’ cash was used to purchase the home but was done through an LLC managed by his first cousin, Jeremy Scherer (Newsom’s mother and Scherer’s mother are twin sisters), for privacy reasons. Scherer is also Newsom’s business partner; he and Newsom’s sister, Hillary Newsom Callan, operate The PlumpJack Group.

When answering an inquiry from the Sacramento Bee in July 2020, Click said that the Newsoms obtained a loan from Scherer to purchase the home because the sale happened so quickly that they didn’t have time to obtain a mortgage, but that they paid back the loan once they obtained a mortgage.

No matter which explanation is the truth (if either explanation is true), the series of transactions is still problematic for the Newsoms since to this day there isn’t a shred of evidence that they were the sole members (or even members) of the now-dissolved LLC that purchased the home, the LLC hasn’t ever been reported on Newsom’s financial disclosure forms or, as far as we can determine, his federal tax forms, and given what we know about the Newsoms’ and Scherer’s income it’s doubtful that either had $3.7 million in liquidity at the time.

To make it clear for the people in the back, Gavin and Jennifer Newsom were given (gifted?) the deed to a $3.7 million home from an LLC that they don’t seem to own, and less than 90 days later took out a cashout refinance loan which provided them $2.7 million, tax-free. So in a year’s time frame, the couple acquired both the estate and $2.7 million in cash.

Not bad. No wonder he thinks things in California are going swimmingly.

What’s the big deal? Well, if the person/people/entities who fronted/loaned $3.7 million for the purchase isn’t an “exempt” person for CA financial disclosure law purposes, Newsom broke the state’s political ethics law, bigly. Under California law, Newsom doesn’t have to report loans from certain family members, including first cousins, “unless he or she is acting as an agent or intermediary for another person not covered by this exemption.”

Or, if the “loan” wasn’t really a loan, then the Newsoms obtained $3.7 million worth of real property as a gift and didn’t report it or pay taxes on it, and the IRS might have some questions for them. If it was a gift and Scherer was simply an agent or intermediary, Newsom would have also had to report that to the FPPC. Obviously, there are likely other legal violations in such a scenario, but since I’m not an attorney I won’t speculate as to what those would be.

By looking at the ins-and-outs of the scenarios Click put forward and comparing them with the available documentation one is left with more questions than answers.

Scenario 1: Newsom’s Cash Paid for the House

From a January 2019 story in the Los Angeles Times, just a few weeks after the home was purchased:

[Newsom spokesman Nathan] Click said the Newsoms paid cash for the house and that the couple plan to sell their Marin County home. The 4,000-square-foot home is worth $3.7 million, according to Zillow.

It seems this reporter attempted to verify the information provided by Click and did a little digging.

The listed agent for the limited liability company that purchased the home is Newsom’s cousin and business partner, Jeremy Scherer. The company shares an address with PlumpJack Wine & Spirits, Newsom’s wine store in San Francisco, according to business records filed with the state. Because the home was purchased through the limited liability company, the ownership stakes and the company’s source of money are difficult to determine because that information is not publicly available.

The Sacramento County assessor’s office website withholds the name of the property owner, citing a state law prohibiting government agencies from listing the home address of any elected or appointed official without their consent.

If the Newsoms provided the money, that’s legal but still raises questions given their overall income (around $1.2 million a year) and the fact that they had an outstanding $3.225 million mortgage on their home in Marin County. Sure, Gavin Newsom’s PlumpJack wine business is successful, but if he pulled cash out of one of his businesses that would have been reflected on his income tax returns, and there doesn’t seem to be any record of that. So, how would the couple have $3.7 million just lying around?

Why Would the Newsoms Create Such a Tax Paperwork Nightmare?

Also, why would they go to the expense (there’s a minimum $800 yearly LLC tax in California, plus Secretary of State filing fees) and hassle of creating an LLC then transfer the home out of it just 10 months later instead of purchasing it in their name to start with? If the only transaction the LLC was involved in was the purchase of the home and the Newsoms were the sole owners, they would have at least an $800 loss to report on their federal income taxes every year the LLC existed – 2018, 2019, 2020, and 2021 (the LLC was dissolved May 21, 2021). For the 2018 tax year, they would also be able to deduct expenses for a home inspection, title search, and other closing expenses. For 2019 there would presumably be legal fees for transferring the home out of the LLC and into their own names.

Based on reports of what’s contained in the Newsoms’ tax returns, they didn’t report this LLC or any loss from it. While Newsom claims that he’s “released” his tax returns every year, that “release” consists of allowing handpicked political reporters to view (not photograph) his voluminous returns in his office for a short period of time. Knowing the drill, in May 2021 Politico reporters showed up armed with blank tax forms and spent their hour transferring the numbers from Newsom’s returns onto the blank forms they’d brought with them. After getting static from Newsom’s office, Politico posted 22 pages of reproduced returns. If, as Click claims, the Newsoms are the only members (owners) of the LLC, there would be a Schedule C showing a loss for this venture. Again, since we don’t have full access to Newsom’s tax returns, we cannot definitively say they did not file a Schedule C, but none of the reports about the tax returns mentions one for this residence.

Politico was lucky; they were given 90 minutes to inspect the return while reporters from the San Francisco Chronicle were only given an hour:

The campaign gave reporters an hour Monday to review the couple’s 2019 returns, which were filed in October after they received an extension. The documents, which totaled several hundred pages, were not published publicly.

Curiously, while they didn’t have a mortgage on the Sacramento estate until 2020, and though they claimed that they rented out their Marin County house for all 365 days in 2019, they deducted just over $15,000 in mortgage interest on their itemized deductions. Since the mortgage interest on the Marin County house was included in the expenses for that rental property, which mortgage were the Newsoms deducting interest for?

If Gavin Newsom abided by the same rules that he expects recall candidates to abide by and produced his entire tax return to the Secretary of State, we could easily solve this mystery. But, he only believes in transparency from his opponents.

Claim 2: Newsom’s Cousin Loaned the Couple $3.7 Million

In July 2020 Click provided a statement via email to the Sacramento Bee when they contacted him for comment about RedState’s original story. They didn’t publish the explanation until August 2021 and, of course, couldn’t bring themselves to print the name “RedState” or link to the story. The story states (emphasis mine):

Allegations that Newsom had failed to properly disclose the home first arose in a conservative blog post last year. In response, Newsom spokesman Nathan Click told The Bee that Newsom and his wife were the only members of the LLC that owns the home and that Newsom didn’t need to disclose it on his statement of economic interest because elected officials are not required to report their residence on that form.

When the Newsoms first bought their home, they were in the process of moving their family to Sacramento so the governor-elect could take office, Click said.

“The transaction moved very quickly and did not allow for the normal period to secure a mortgage,” Click wrote in an email. “As a result, funds to purchase the home were advanced by an immediate relative of the Newsoms with the understanding they would apply for a mortgage and repay the funds.”

The Newsoms later started the mortgage process and transferred the title of the property from the LLC to themselves and repaid the family member who had given them the original money to buy the house, Click said.

This explanation is much more problematic, and it’s truly surprising that the Bee went ahead and published it.

First of all, the timing issue is total bunk. Newsom won the election on November 6, 2018, but there was never any doubt that he would win, so the couple had to be discussing where they’d live for months before that. The LLC was created November 28, 2018, the Fair Oaks home went into escrow on November 29, and escrow closed on December 22, a 23-day escrow. That’s seven days shorter than a traditional escrow, but plenty of time for a high net worth couple like the Newsoms to secure a mortgage. A mortgage banker with more than a decade of experience funding and purchasing high net worth mortgages told RedState:

“High net worth mortgages routinely close in 23 days, especially if the client has a longstanding relationship with the lender. The bank usually won’t need tax returns, but will ask for a year’s worth of bank statements and investment account statements.”

In the Newsoms’ case, the mortgage they ended up obtaining on the home was through Union Bank – the bank that’s held their mortgages throughout their marriage. Scherer’s San Francisco home is also financed through Union Bank.

The only possible wrinkle in obtaining a mortgage in 23 days would have been the fact that the Newsoms had an outstanding mortgage for $3.225 million on their Marin County home, which they’d just refinanced in late 2017. According to their 2019 tax returns that home was rented out starting January 1, 2019. Still, the mortgage banker RedState consulted said that if the Newsoms provided a rental contract showing that they’d be receiving $12,000 a month in rent on the Marin home, that shouldn’t have affected their ability to be approved for a mortgage on the new home.

Second, when the Newsoms did obtain a mortgage in January 2020, it was for $2,695,000. Assuming that they paid that entire amount to Scherer (we know that they didn’t pay property taxes with it), they still would have owed Scherer just over $1 million. How is that being paid off? Or was it forgiven? We don’t know yet if it will be reflected on the Newsoms’ 2020 tax returns since they got an extension and haven’t filed them yet – even though Newsom had enough information to file his 2020 Form 700 in March 2021.

Third, as stated before, there is no substantiation of Click’s claim that the Newsoms were the only members of the LLC that purchased the home or even members, period. Scherer’s name is the only one listed on filings with the California Secretary of State.

While Click’s emailed statement doesn’t name Jeremy Scherer as the “immediate relative,” assuming that he is the source of the loan also raises questions. Lots of them. The questions below all assume that the Newsoms were the only members of the LLC.

  • How does Scherer, a 41-year-old married accountant who’s only ever worked at PlumpJack, have $3.7 million lying around?
  • Since loans from first cousins don’t have to be reported to the California FPPC, and assuming that the house was used as collateral, why wouldn’t Scherer record the loan?
  • Did the LLC wire the funds to the escrow company to complete the purchase? Did the escrow company verify the origin of those funds before the transaction closed?
  • Did Scherer deposit/wire the $3.7 million into the LLC’s account or into the Newsoms’ account? Was a CTR report filed?
  • Did the LLC categorize Scherer’s funds as an equity contribution or as a loan?
  • If the issue with the Newsoms getting a mortgage was the quickness of the transaction, how did they get around “seasoning” rules for the $3.7 million? (“Seasoned” funds have been in one’s bank account for at least 60 days; the LLC hadn’t even been in existence for 30 days at the time escrow closed.)
  • Why didn’t Scherer just purchase the home and allow the Newsoms to live there until they could get their own mortgage?

If the transaction indeed went down that way, it would be reflected in the Newsoms’ tax returns in a variety of ways. As discussed above, from the available information there is no sign of it on their tax returns.

Also, the ownership of the LLC should be a required disclosure on Newsom’s Form 700 at least for the year 2018 (information regarding an officeholder’s private residence doesn’t need to be listed) even if the loan wasn’t required to be disclosed. The LLC wasn’t listed on Newsom’s 2018 Form 700. Using convoluted logic, the FPPC determined in July 2021 that Newsom’s failure to disclose acquiring a second home worth $3.7 million was totally allowable. In a letter to Newsom’s attorney, the FPPC’s Christopher Burton wrote:

Section 87200 of the Act requires that elected state officials, including the Governor, report investments, business positions, and sources of income, including receipt of gifts, loans, and travel payments, from sources located in or doing business in their agency’s jurisdiction, on their SEIs.

Under the Act, “investment” includes any investment interest in a business entity. Section 82005 of the Act defines “business entity” as “any organization or enterprise operated for profit.” Our investigation found that, although an entity, solely owned by Newsom and his spouse, was created to effect the subject real property transactions, it was not operated for profit and, therefore, did not give rise to a reportable investment interest.

While not making a specific determination as to the source of the $3.7 million, Burton determined that it, too, wasn’t reportable:

Our investigation found that all payments related to the purchase of the subject property emanated from either Newsom himself or an exempted family member; therefore, the payments did not give rise to any reportable gift or income interests.

Why would Burton not state specifically what their investigation revealed about the source? In a dozen other “no action” letters issued by the FPPC and reviewed by RedState, specifics of the transactions being investigated and the findings made by the FPPC are listed, but the letter sent to Newsom is incredibly vague. It doesn’t even state that the purchase of a home and its transfer out of an LLC was the incident at issue; it simply says they investigated allegations that Newsom “failed to properly report certain economic interests on his statements of economic interests (“SEI”) in connection with the purchase and subsequent transfer of certain real property in 2018 and 2019.” Burton doesn’t list any documents the FPPC allegedly reviewed in making their determination or people they might have interviewed.

Not surprisingly, the FPPC found that Newsom didn’t break any ethics laws.

The FPPC didn’t determine that the Newsoms’ taxes were filed correctly, though – but give them a few weeks and they’ll make that determination, too. They’ve made a complete mockery of their mission and objective (emphasis mine):

The mission of the Fair Political Practices Commission is to promote the integrity of state and local government in California through fair, impartial interpretation and enforcement of political campaign, lobbying and conflict of interest laws.

The Commission’s objectives are to ensure that public officials act in a fair and unbiased manner in the governmental decision-making process, to promote transparency in government, and to foster public trust in the political system.

The question of who provided the $3.7 million to the Newsom/Scherer LLC to purchase what is now the Newsoms’ estate is still completely unresolved. If the FPPC has information showing with certainty where that money originated, to be true to their mission and objectives they must release that information to California voters immediately.