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SB 939 allows virtually all commercial property tenants to walk away from their lease obligations altogether

 Sacramento — Opponents of SB 939 (Wiener), including minority business groups like California Black Chamber of Commerce, California Asian Pacific Chamber of Commerce, Hispanic 100, and TELACU again warned Sacramento lawmakers that instead of helping struggling businesses affected by the pandemic, SB 939 will make the problem much worse by leading to widespread commercial property foreclosures and lost jobs.

SB 939 was put on the Senate Appropriations “suspense” file today. Opponents are urging the Senate Appropriations Committee to hold the bill on suspense when it comes up again for a vote on June 18/19 and keep it there indefinitely.

SB 939 would allow businesses large and small to withhold rent indefinitely regardless of how profitable they are and creates a new, special protected class of businesses that can to walk away from lease obligations altogether, transferring the debt to the property owner. While the bill has been characterized as applying only to restaurants and select small businesses, it in fact applies to virtually all California commercial leases.

“This bill goes way too far. Property owners still have to pay their mortgages, utilities, property taxes and other expenses and they’re doing it with vastly reduced rental income now,” said Rex S. Hime, President and CEO, California Business Properties Association (CBPA). “This bill will allow nearly all commercial tenants to walk away from their lease contracts and make an existing problem go from bad to worse. Bottom line, it will slow our state’s economic recovery.”

Continued Hime, “The coronavirus threw us all for a loop but measures have been underway for weeks by property owners to negotiate rents with their tenants to keep them in place. Property owners have every incentive to keep existing tenants, not evict them. It’s extremely costly to have spaces sit vacant while finding new tenants. No one wants that. It’s not just businesses that will be hurt. SB 939 also negatively impacts state and local government coffers.”

Below is more background on SB 939.

Myth: SB 939 only applies to restaurants and other struggling small businesses.

FACT:  As currently drafted SB 939 applies to every California-based commercial lease in the state regardless of the type of business, its size or documented lost business due to COVID-19.  There are two sections of the bill.

• Section 1 eliminates the obligation of all California-based commercial renters to pay their rent retroactive from March 2020 for an indeterminate amount of time, tied to the state’s Emergency Order. And it does not require payment of rent until 12 months after the order is lifted. As an example, if the state’s emergency order is lifted at the end of the year, businesses could be operating and generating revenue for more than a year, but not be required to pay rent until January 2022.
• Section 2 is the part of the bill supporters promote because it focusses only on bars, restaurants and places of entertainment.  However, this section is equally problematic because it creates a new, special class of commercial renters and allows some to simply walk away from their leases regardless of contractual obligations or previous investments made by the property owner. This essentially transfers the debt of one business to another.  This section also applies a new definition to “small business” – up to 500 employees – which is five times larger than the state’s current definition.  According to the National Restaurant Association, 90% of restaurants employ fewer than fifty employees.

Myth: SB 939 is just temporary to allow struggling small businesses to get back on their feet.

FACT: There is no end date or sunset on SB 939 – it is tied to the State’s Emergency Order.  The future of COVID-19 and the status of the State’s Emergency Order remain very uncertain and both could last well into 2021.  As explained above, even if the Emergency Order is lifted at the end of this year, SB 939 would allow even sizable businesses that generate healthy profits in 2020 and 2021 to operate in their spaces without any obligation to pay rent until 2022. All businesses in California are suffering under the state’s shelter-in-place orders.  And according to the Small Business Association, nearly 41,000 real estate companies in the California shopping center sector alone have fewer than 20 employees and are themselves “small businesses.” It is simply unrealistic to expect any company to cover the contractual debt obligation for another for an extended or undetermined amount of time. And, banks and mortgage holders will undoubtedly call loans into default.

Myth: SB 939 is needed to force commercial property owners to keep tenants.

FACT: Property owners are already incentivized to keep existing tenants: Nobody wants an empty building. And trying to find new tenants is far more costly than finding creative ways to keep current tenants. Most property owners are working with their renters and tenants to provide relief while keeping them in their spaces.

Myth:  Commercial property owners and landlords are all large multi-national corporations.

FACT: Not true. According to the Small Business Association, nearly 41,000 real estate companies in the California shopping center industry alone have fewer than 20 employees. And just that sector of the industry has already lost $3.5 billion in rent revenue, resulting in less tax revenues for communities. CalPERS and CalSTRS also own millions of dollars worth of commercial property; it is these investments providing retired California workers and educators an income and health care.

Myth: SB 939 will help small businesses; it won’t hurt them.

FACT: SB 939 tries to help some small businesses by shifting the financial burden onto others already struggling. The bill empowers some renters to walk from the leases or significantly reduce their financial contractual obligations but does nothing to reduce the mortgage payment or other financial obligations still owed by the property owner. Property owners, like businesses and restaurant owners, come in all shapes and sizes. But they all rely on rent from their tenants to pay their mortgage, property taxes, building maintenance and utilities.

Myth: SB 939 will help jumpstart our economy by removing the burden of rent on small businesses.

FACT: SB 939 flies in the face of basic economics and will do the exact opposite. It will trigger a commercial mortgage default crisis that will thwart economic growth for years and stall our recovery. Thousands of mortgages will go unpaid, property values and local and state property taxes will further plummet and millions of square feet of empty office and retail space will sit empty for an extended period of time.

There are better, and more balanced approaches to addressing this problem:

• Amendments were offered: Shortly after SB 939 was introduced amendments were offered to the author mandating both parties negotiate in good faith. Any party found not to be acting in good faith would lose legal and financial remedies that are granted under current contract provisions. This approach would ensure collaboration and conversation by both sides and incentivize a solution, not foreclosure.
• Both the Senate and Assembly leadership have recently acknowledged that the state has an important role to play in helping both tenants and property owners recover from the economic impacts of this pandemic: Senate leaders’  May 12^th  release of a “State Budget Approach, Proposal to Aid California’s Economic Recovery” included the suggestion that property owners and landlords provide rent relief and a commitment not to evict tenants in exchange for tax credits from the state equal to the value of the lost rents, spread equally over tax years 2024 through 2033.
• AB 1410 (Caballero) attempts to address the same problem for residential property but is more balanced, recognizing the financial plight of both renters and property owners. Her bill provides state-funded relief to renters and tax credits for property owners. The same could be applied for commercial tenants and property owners.