Gabriel Dillard

published on June 22, 2020 - 2:38 PM
Written by Gabriel Dillard

Senate Bill 939, a bill that sought to completely upend commercial real estate as we know it, failed to pass out of a committee in Sacramento last week.

SB 939 would have established tenant protections for lessees impacted by Covid-19 by instituting an eviction moratorium on all commercial tenants until 90 days after the emergency order that began on March 4 is lifted.

Perhaps even more draconian, for restaurants, bars and entertainment venues that saw reductions in revenue of 40% or more because of shelter-in-place orders and are facing occupancy reductions of 25% or more, the bill would have forced landlords to renegotiate lease terms. If terms couldn’t be reached, tenants could leave without loss of their personal guarantee, whether that be a home or 401K.

The bill seemed to be on a success track, passing California’s Senate Judiciary Committee on May 22. But it couldn’t make it out of the Senate Appropriations Committee last week.

But as things go in Sacramento, it could come back, especially if economic recovery is slow going. Here is a story from Reporter Edward Smith about that bill, when it was still alive on June 12 in the print edition of The Business Journal.

 

Bill could upend landlord-tenant relationship in California

By Edward Smith

Sitting on the floor of the Senate Appropriations Committee in Sacramento is a bill that some fear could transform the commercial real estate market.

Some say Senate Bill 939 will save business owners trying to stay afloat in an unprecedented time. Others fear the bill disrupts the balance between tenants and landlords.

On May 22, the bill passed out of California’s Senate Judiciary Committee. It is now being held by the Senate Appropriations Committee for amendment, which legislators believe must happen for it to advance to the Senate floor.

SB 939 establishes tenant protections for lessees impacted by Covid-19. It first establishes an eviction moratorium on all commercial tenants until 90 days after the emergency order that began on March 4 is lifted.

Beyond that, tenants will have up to a year to repay back rent.

“This has been such a pervasive change in the way that people do business and attitudes that I think it’s going to take a while for people to get back into their normal flow,” said Doug Holton, president of Siegel & Co., a property management company in Fresno. What’s more is those potential customers have been hit just as businesses have, said Holton. Discretionary income for consumers may have dropped as panic has risen.

What SB 939 does is stop landlords from taking action on tenants unable to pay rent. This means that not only are eviction notices unable to be served, but actions such as turning off power or water could result in fines to landlords.

Of the 420 retail tenants on Siegel & Co.’s portfolio, 154 have asked for some level of rent relief, said Holton. “And I’m still getting requests,” he added.

Holton fears government involvement in how they accommodate tenants in need — something he says they already do. Each tenant has different needs.

They are discussing partial rent payments or even just paying what are called “triple-net” expenses, such as landscaping or insurance.

The bill defines small businesses as those with 500 employees or fewer, and also defines businesses impacted by Covid-19 as those whose revenues dipped 20% or more and also businesses that may have had to adjust their operating hours.

The second section of the bill is what some view as the most contentious. For restaurants, bars and entertainment venues that have seen reductions in revenue of 40% or more because of shelter-in-place orders and are facing occupancy reductions of 25% or more, the bill forces landlords to renegotiate lease terms. If terms can’t be reached, it allows tenants to leave without loss of their personal guarantee, whether that be a home or 401K.

“The goal isn’t to have lots of people leaving their businesses. It’s actually to really create a bit of leverage to bring landlords to the table,” said Gwyneth Borden, member of the steering committee for the Bay Area Hospitality Coalition. “Leases are fairly black and white, there really isn’t a reason for the landlord to come to the table,” she went on to say.

The Hospitality Coalition worked with Sen. Scott Wiener (D-San Francisco) to write the bill.

Restaurants originally negotiated a lease expecting to be able to have so many people in their restaurant and governmental action reduces their ability to seat people and make money, said Borden.

“This virus specifically attacks the role that they play in society and through no fault of their own, they’ve been diminished in their capacity and ability to operate,” she said.

Some fear, however, that it simply transfers debt from tenant to property owners. They also fear that businesses can abuse the statute.

Already, opponents of the bill are seeing what they believe are law firms and tenant-only brokerages encouraging the use of city and county ordinances banning commercial evictions to negotiate better leases.

“We recommend that you don’t sacrifice your long-term negotiating leverage for short-term rent relief before you understand all of your options,” according to an email from San Diego-based Star-Hughes Group, a commercial real estate brokerage that represents only tenants and buyers.
For property owners with mortgages, it can create uncertainty.

“By unfairly requiring property owners to carry rent for more than a year and also giving certain tenants the ability to walk away from a lease contract regardless of fiscal impact, SB 939 trades a short term business revenue problem for a long term commercial property foreclosure crisis,” said Rex Hime, president and CEO of the California Business Properties Association.

In many cases landlords have already discussed solutions with tenants. By requiring tenants to meet with landlords, if a new lease isn’t favorable, they can leave without consequences. Keeping a tenant is in the landlord’s best interest, said Holton, and finding a new tenant can be more costly than finding creative solutions that help both parties.

“I think the lawmakers are stepping in where they’re not needed, where they don’t belong,” said Holton. “If someone else can come along and decide that a contract can be canceled then we have a huge problem.”


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