Commercial Real Estate Development Association Warns Proposed Legislation Would Exacerbate State’s Financial Crisis
NAIOP, a premier commercial real estate development and owners association has announced its opposition to California Senate Bill 939. SB 939 is pending before the state legislature and threatens to replace a loss in business revenue problem with a statewide commercial mortgage crisis. If passed, SB 939 would, on a statewide basis, give commercial tenants a unilateral termination right, with no future obligations, including by their third-party guarantors, upending previously reliable contractual obligations. In doing this, it sets a dangerous precedent, undermining the validity of existing, mutually negotiated lease agreements in the state.
The draft legislation, introduced by State Senator Scott Wiener (D-San Francisco), generally requires commercial property owners to defer rent for certain small (i.e. businesses with up to 500 employees) commercial tenants. In addition, for an extended period, the draft legislation gives restaurants, bars and “entertainment venues” the right to terminate leases without paying for contracted rent, which rent includes reimbursement of commissions, tenant improvements and other costs invested by landlords in reliance on collecting repayment over the applicable lease term. Additionally, the current bill prevents commercial landlords from serving termination notices on existing defaulting tenants until a full year after Governor Newsome lifts the State’s COVID-19 ongoing Emergency Order. Service of any such termination notice would constitute a violation of California’s unfair business practices prohibition, opening many businesses to consider liability, and subjects landlords up to a $2,000 penalty. Further, the law would take effect immediately and would continue for at least 22 months from March 2020 until December 31, 2021, or, if earlier, two months after the lifting of the ongoing State of Emergency.
NAIOP San Francisco Bay Area (NAIOP SFBA) and NAIOP Silicon Valley, two local Bay Area NAIOP Chapters, oppose the bill based on the likely outcome of wholesale rent forgiveness for an ill-defined category of commercial tenants resulting in landlords’ inability to meet their ownership obligations because it does not reduce or address existing mortgage payments, taxes, insurance and other operating costs still owed by property owners. NAIOP argues that, like restaurants and bars who rely on revenues from customers to pay their vendors and staff, commercial property owners are both small businesses and large institutions that rely on rental income to pay their expenses, operate their buildings safely, pay employees, and maintain these ongoing obligations. NAIOP SFBA and NAIOP Silicon Valley join California Business Properties Association (CBPA), the State’s largest commercial real estate consortium, in calling on the legislature to pass legislation that balances the needs of both tenants and property owners.
“All Californians, especially property owners, want business to get back to normal and particularly want restaurants and bars to succeed and thrive,” said David Karol, Principal, Ridge Capital Investors, LLC and NAIOP SFBA Chapter President. “All businesses are impacted by this pandemic; however, this dangerous bill provides protection to only a small segment of the business community and causes harm by removing the rights of other business owners who happen to be in the business of leasing space.”
“Most of us owners have been working countless hours on a case by case basis to provide customized relief to our particularly impacted customers, and we do it gladly because it is the right thing to do,” said Dick Scott, Divisional Vice President of PS Business Parks and NAIOP Silicon Valley Chapter President. “The state, in their attempt to accommodate certain stakeholders of a contract, would be arbitrarily punishing the other side of the contract who have done nothing wrong. In fact, most owners that I know have been part of the de facto solution by deferring rent, extending terms, and even abating rent in some situations. The state’s proposal would turn contract law on its head, it is unconstitutional and un-American, and it would virtually guarantee years of litigation within a court system that will already be overloaded. In the end, our state, our economy and our valued tenants would lose. Please join us in opposing this ill-founded, unconstitutional, and un-inclusive proposal.”
About NAIOP San Francisco Bay Area Chapter (NAIOP SFBA) and NAIOP Silicon Valley Chapter
NAIOP is a Commercial Real Estate Development Association, for commercial real estate developers, owners and related professionals in office, industrial and mixed-use real estate. Between NAIOP San Francisco Bay Area and the NAIOP Silicon Valley, the two local Chapters separately manage a full calendar of educational programs on topical issues as well as social and networking events for their respective membership and guests. The NAIOP SFBA Chapter’s Government Affairs Committee and NAIOP Silicon Valley Public Policy Committee works in concert with NAIOP Corporate, the NAIOP State Council and our Sacramento representative, California Business Properties Association (www.cbpa.com), as well as communicating with legislators at the local level, to voice the concerns and support of our membership on legislative issues affecting our industry. Nationally NAIOP is comprised of 20,000+ members in 52 chapters across North America. For more information, please visit www.naiopsfba.org and www.naiopsv.org.