How Will California’s SB 939 Affect Commercial Real Estate If It Passes?

Coronavirus has had devastating effects on all businesses, but the hospitality industry, including restaurants, cafes, and bars, has suffered the most consequences. This is why the state of California has decided to provide help with a new bill in order to avoid mass closings. However, the landlords of these properties may not be so pleased with the new bill if it passes.

The state’s Senate Judiciary Committee advanced a bill that would allow small businesses, like restaurants, cafes, and bars,  to renegotiate their lease deals if they have been affected by economic shutdowns. If an agreement isn’t reached after one month of negotiations, the tenant can leave the lease without penalty. SB 939, if it passes, would also ban evictions for not paying rent during California's state of emergency declaration. The bill could go into effect at the earliest in late September.

It would also give California’s commercial tenants one year to pay back up to three months of deferred rent. This provision is meant to help struggling businesses in the hospitality sector, which has been hit especially hit by the economic shutdown and is at risk of seeing a mass extinction of bars, restaurants, and cafes.

However, the bill has caused controversy, with opponents saying it will cause unfair challenges for commercial landlords.

They think that the bill is too confusing and poorly written, does not consider the needs of both parties, and will only prolong the economic issues it tries to address. Landlords say that they won’t be able to collect the pre-pandemic rents from these bars, restaurants, and cafes, so the choice is not between the entire rent and reduced rent, but between reduced rent and no rent at all.

Additionally, Landlords, and many others, believe that this bill will cause undo vacancies throughout the commercial real estate market, and cause many businesses to have to shut down for months as they look for new spaces, and higher costs to the small businesses as they build out the space to suit their needs (something most Landlords in this environment are either unwilling, or unable to help with).

Senator Wiener says many landlords are already working with tenants - restructuring leases and waiving backrents.

While the help for tenants is welcome, landlords will still have obligations that they may struggle to meet if SB 939 is passed. SB 939 is an effort to avoid widespread closures of restaurants and businesses. However, it leaves a huge burden on property owners, without offering any way for them to deal with their obligations to pay property costs, mortgages, taxes, and other expenses.

Senator Wiener claims that SB 939 incentivizes negotiated rents. He states that because businesses will have a better chance of surviving, landlords won’t lose their tenants during this time, and rents would go back to normal in the next period. However, landlords don't think it’s that simple because it doesn’t address the fact that they have to pay for building upkeep, utilities, all unexpected costs, and mortgage payments. For example, many of them are wondering if they can just shut off the water, electricity, and gas if the tenants don’t pay. If the bill passes, it threatens to cause a possible commercial property collapse later this year. It has the potential to backfire if only a few landlords decide to renegotiate.

Are you worried about your commercial real estate property? For more information, you can reach us at info@cbicommercial.com