Friday, June 19, 2020

Is SB 939 Good for Commercial Real Estate Owners?

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In this columnist’s opinion - NO! Ok. See y’all next week. But since I’ve a bit more space - allow me to expand. First a bit of background.

SB 939 - if passed - would provide rent relief for tenants impacted by the Covid-19 shutdown. In some instances - tenants would be allowed to terminate their lease if they cannot reach agreement with their landlords. SB 939 is presently making its way through Senate sub-committees. Recently confirmed in the judiciary by a vote of 5-1 with three abstentions - next up is the Senate appropriations. In its amended form - the lease termination provision has been narrowed and only applies to restaurants, bars, and places of entertainment but the rent relief would be available to ALL commercial tenants meeting certain criteria. You can read more about the bill here California Senate Bill 939 Includes Significant Protections for Commercial Tenants Impacted by the COVID-19 Pandemic: Eviction Moratorium, Rental Deferment, and Right to Modify Rental Obligations or Terminate Lease | Seyfarth Shaw LLP and here SB 939’s New Controversial Provision: Eviction Protections For Covid-Impacted Tenants In ALL Industries (Not Limited To Restaurants, Etc.) – A.I.R. Forms Practitioner

To be sure - certain segments of our economy have been devastated by the self imposed interruption. Restaurants, bars, entertainment venues, amusement parks, movie theaters, and the like may never fully recover. We have witnessed several high profile bankruptcy filings such as JC Penney, Hertz, and Pier One Imports with others threatened like 24 Hour Fitness and AMC. Some may say - we were clipping along quite nicely. Actually, we were on pace to have our best year yet and wham! Our revenue - and thus our ability to pay rent - was crippled by a microscopic culprit and government’s response ordered us to stay at home. I get it! And since the business impact was completely out of our control - someone should step in and provide a cure. Enter SB 939. Easy enough in theory. A bit more difficult in reality.

Disrupted is the contractual relationship with two consenting parties - a tenant and his landlord. Here is how. A lease is an extension of credit from a landlord to a tenant. In return for a schedule of timely rent payments - a landlord delivers possession of his building to the occupant for a period of years. The occupant may lawfully use the premises. Simple. Most commercial leases provide for remedies in the event of default - a tenant decides not to pay or a landlord fails to fix something. At the extreme - an owner may evict a defaulting tenant - give him the boot. SB 939 changes this relationship in favor of the tenant - with no regard to the owner. Here’s why that one sided approach is a problem.

Some owners leverage rent checks as debt repayment. If a tenant fails to pay - an owner must then subsidize his mortgage. If deep pocketed - great! If not - then what? With no income from his occupant and no ability to find another tenant -because of the bill’s provisions - an owner must appeal to his bank for help. SB 939 places the rule of law behind the occupant for rent relief but not behind the owner who must fend for himself and suffer the consequences imposed by his lender. Quite slippery is the slope when government attempts to intervene between agreements made by its citizenry.

Look. I’m all for saving tenants as they are the lifeblood of commercial real estate. I even wrote about it here. Plus, I’ll admit - some commercial real estate owners have enjoyed a very good ride since the doldrums of the Great Recession - sometimes by increasing rents on tenants with few options but to remain in residence and swallow the bump. But, because the issue was created by government’s reaction to the virus - the solution is not by creating government overreach with bills such as SB 939. My fear is a spate of bank foreclosures. 

Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at or 714.564.7104. His website is

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