California Senate Bill Could Allow Some Tenants to Walk Away
Article By: Katie Burke, CoStar News | May 19, 2020
A proposed bill aimed at providing eviction protections to some of California's commercial tenants is setting up a battle among lawmakers and landlords.
For Matthew Hargrove, the senior vice president of government relations for the landlord advocacy group California Business Properties Association, the bill is like a nuclear bomb waiting to go off for the state's commercial real estate industry.
"The bill is a complete jam on property owners," Hargrove said of the proposed legislation intended to prevent a wave of coronavirus-related closures. "We know where this is coming from, but at its core, the underlying philosophy of the bill is pitting landlords and tenants against one another. It's asking one business to be a safety net for another."
Under the state bill, known as Senate Bill 939, commercial landlords would be barred for more than a year from evicting tenants, even ones that are not paying rent, that have suffered financial losses since the governor enacted a state of emergency in early March. It would also allow some commercial tenants such as a restaurant, cafe, bar or entertainment venue to renegotiate the terms of their lease, which could include modifying rental rates or even terminating the lease altogether, if they can prove they have experienced a drop in monthly revenue since the start of the state's shelter-in-place directive. Publicly traded companies and their affiliates would not be eligible.
The bill, authored by San Francisco Democrat Sen. Scott Wiener and Los Angeles Democrat Sen. Lena Gonzalez, is the first statewide effort to keep tenants in their spaces and is meant to give them the power the lawmakers say is necessary to stay in business. It was amended last week and scheduled for a Senate hearing on Friday.
Since the state's shelter-in-place order was issued in mid-March, a majority of businesses have been forced to close or operate on severely limited capacity. Restaurants, in particular, have mostly had to shift their businesses to a delivery or takeout-only model, which has resulted in some early estimates that the state is in danger of losing up to one-third of all its restaurants as a result of pandemic-induced financial losses.
Protections for commercial tenants so far have been granted on a city-by-city basis. In San Francisco, for example, a temporary ban on commercial evictions for small and midsize businesses was enacted March 17.
For Wiener, the proposed legislation is about creating the statewide framework for a conversation between a tenant and a property owner — "not about screwing over the commercial landlords," he said.
"We have a big problem now where, even if a tenant is able to hold on through the shelter-in-place, reopen and figure out how to pay all the back rent they owe, they'll still be in trouble," Wiener told CoStar News of his goal to prevent a mass extinction of businesses. "These businesses are operating under leases with rent calculated on a reality that no longer exists. The pandemic has made a lot of these leases no longer viable or relevant."
He said that the lease termination provision is meant to create an atmosphere for renegotiation that would "bring landlords to the table."
"The legislation doesn't micromanage what the lease restructuring looks like; our goal is to ensure that negotiation happens," Wiener said.
New business environment
Statewide, landlord groups and other commercial real estate-focused entities including law firms have begun calling on their members and clients to contact their representatives to voice their opposition before the hearing on Friday.
"Simply saying all of the contracts in the state are null and void because a tenant is in trouble has serious long-term impacts on the state's business climate," Hargrove said. "There's a fundamental misunderstanding in that we're all in the same market. There's no benefit to a commercial building owner kicking out a good tenant that wants to pay rent but is having some issues. It's not like there are other tenants lining up and waiting to come in."
After issuing rent deferrals, abatements or short-term allowances to their tenants over the past couple of months, Hargrove said that, for a majority of the state's commercial property owners, the bill is akin to Lucy pulling the football out before Charlie Brown can kick it.
"There are people in the industry saying this is crazy," the CBPA senior vice president said, adding the advocacy group has suggested amendments from potential tax credits to direct grants to taking a closer look at possible disaster insurance plans.
One alternative proposal the CBPA is backing is being led by a group including Senate President Pro Tempore Toni Atkins, a San Diego Democrat, that would provide tax credits equal to the value of lost rent to landlords that provide rent relief and a commitment not to evict tenants and allow those tenants to repay missed rent to the state over a 10-year period.
Wiener said the proposal hasn't been written or introduced and, as of now, would apply only to residential tenants.
"Someone could certainly make that proposal, but it will have a public cost," the senator said when asked if he would support a similar bill that would also include commercial tenants.
With his proposed bill, "we're proposing just one idea, and before this, no one had proposed anything," he said. "Landlords didn't come forward with a plan to prevent mass extinctions, and when we put an idea on the table, we welcomed other ideas. It's not good enough just to say no."
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