In a recent webinar that took the format of a town hall, we were thrown a curveball. The last question posed was what we thought would happen to the housing industry and the overall economy if a new president were elected or if Trump were to stay in office. We can’t see that far – November is an eternity.
Our role at Bornstein Law is not to get mired into politics, choose sides, or predict a future that is becoming stranger and stranger, but to assist owners in a time when they have been deluged with new laws and rules to follow. We are taking this one day at a time, and our goals are not all that lofty. We want property owners and tenants to come out successfully on the other side of COVID and not wake up to a blue sky turning orange.
Some encouraging signs that a rust-colored sky will pass.
The real estate market has been surprisingly robust, and this isn’t intuitive – you might have guessed at first that the pandemic would decimate our community. The strength of the market is probably owed to a confluence of factors.
Skittish investors are shifting their money from the stock market to real property, low-interest rates have inspired new homeownership, and residents are migrating away from high-rent areas. The federal government has injected a massive amount of liquidity into the economy, at least at the outset of the pandemic.
While the feds pumped out a lot of money, exactly how tenants could pay the rents and how landlords could survive without rental income was a peripheral concern for Washington – the survival of landlords seemed to be an afterthought. This has left many cash-strapped California renters forced to accumulate a mountain of debt as mom and pop landlords teeter on the edge of losing their properties and retirement income.
Daniel Bornstein told the San Francisco Chronicle that rather than landlords shouldering the societal burden of unpaid rents, interest-free loans should be made available to keep property owners solvent while giving some leeway to tenants who risk eviction. Since then, the COVID-19 Tenant Protection Act of 2020 has passed, which will inevitably and tragically lead to the eviction of distressed tenants who will not have a bucket of cash to pay the 25% of total rent that becomes due in January of 2021. We cover the new law here.
Like everyone else, Bornstein Law wishes this pandemic will end, job-shedding will stop, and we all return to some semblance of normalcy. We like boring.
It’s rare that landlord and tenant groups see eye to eye, but everyone has called upon the federal government to do more. Whoever occupies office, we trust that they will think coherently on the economics of housing and not put landlords at risk. Until then, property owners have been asked to shoulder an inordinate amount of responsibility for the societal costs of the crisis.=
Our landlord clients feel as though the heavy lifting has been borne by one class of individuals at the expense of others.
Bornstein Law dodges the question of who we want as elected officials. Our primary wish is for everyone to stay healthy, maintain a positive orientation, and have a rust-colored sky replaced by blue. Literally and figuratively.
Billionaires can help economically distressed landlords and tenants with a sensible solution.
Tenants are fearing homelessness, while many cash-strapped landlords are in dire straights. Private-sector interest-free loans could assuage the fear of eviction while keeping landlords solvent.
When COVID-19 reared its ugly head, tenants’ advocates sounded the alarms, and lawmakers heard the call. Fearing massive displacement of renters who have lost income due to the pandemic, and with unemployment benefits ending soon, politicians have gotten together to enact ever-expanding eviction moratoriums and a wide range of tenant protections.
There is no doubt that this virus and the economic fallout does not discriminate against landlords or tenants. Everyone has suffered. There is no “tenant camp” or “landlord camp.” The question now is how to bounce back and find equitable solutions that recognize the pain of both tenants and rental property owners. Thus far, the proposals have been lopsided.
In Sacramento, several crackpot measures like reducing rent across the board by 25% (AB 828) and giving tenants years to pay back COVID-related debt have been defeated or stalled. SB 1410 was one of the few bills that acknowledged the hardship of landlords. In its original form, SB 1410 would pay 80% of back rent to landlords in exchange for reasonable concessions. The re-worked bill was watered down, however. and would not have provided much-needed cash assistance to landlords. Instead, owners would be entitled to tax credits spread out over many years. With the proposal butchered, SB 1410 lost its blessing from the California Apartment Association (CAA).
Mortgage forbearance is a band-aid fix
Another bill, AB 1436, would be a token act that grants a one-year mortgage forbearance to small landlords with up to four units; landlords with five or more units could request just six-months forbearance. Although branded as landlord relief, AB 1436 provides no aid to landlords trying to make ends meet.
A reality that often goes unacknowledged is that when owners don’t make money from their rental properties, tenants suffer. Maintenance, upkeep, and necessary repairs fall to the wayside.
There are other measures we won’t survey here, but suffice it to say that after looking high and low, we could not find any legislative proposals that assist in helping owners. It’s been said by one former California governor and president that government is the problem and not the answer, but there is a private market that is willing and able to chip in and offer solutions.
Bay Area wealth can put a big dent in the crisis
Let’s explore the possibility that vocal, socially conscientious people who have the means to make a difference can step up and actually put a dent in this crisis.
Being in the tech capital of the world, there’s no shortage of money to go around. As Forbes reports, California is home to 165 billionaires, of which a good number reside in the Bay Area. Governor Newsom in his first days in office called upon tech giants to provide developers with low-interest loans to build housing for teachers, nurses, and other middle-class Californians. So asking well-to-do companies to help solve our current crisis is not a radical idea.
A lifeline for landlords
There have been numerous well-endowed individuals, corporations, philanthropies, and foundations who have raised their hand and said they want to be part of the solution. They can now step up and help preserve housing by giving interest-free loans to tenants in order to fulfill past due rent. In so doing, they would give a lifeline to landlords who depend on rental income to sustain life and maintain the comfort and amenities that tenants want and demand.
“Someone needs to tap (the billionaires) on the shoulder, and say, ‘Now is the time to be there for us. What are you waiting for? This is the crisis.”
This is what Daniel Bornstein told the San Francisco Chronicle, and the publication conceded it’s not that far of a stretch considering Jack Dorsey, the head of Twitter and Square, forked over $1 billion to coronavirus relief and donated $10 million to close the digital divide for Oakland students.
Billionaires, please stand up
Facebook, Apple, and other huge tech companies have put their money where their mouth is by pouring many millions into affordable housing programs. How about a similar effort—a private-sector pool of wealth providing interest-free loans—to enable tenants to pay their rent? Many tenants need the funds now—and landlords rely on that money. True, state and local moratoriums on evictions for pandemic-related non-payment of rent still obligate the tenant to pay their back rent, but they defer that obligation to the point that it becomes increasingly unlikely that the tenant will be able to pay it back—especially if she has accrued up to 15 months of indebtedness, as AB 1436 would have allowed. Worst of all, however, these eviction moratoriums place the burden entirely on the owner to collect the back rent, an effort that anyone who’s been through it knows, is costly, time-consuming, emotionally draining—and often unsuccessful.
Obviously, many details need to be worked out for the successful implementation of this model. For example, who would administer the loans? Would the funds be disbursed directly to the landlord in order to ensure that the money gets spent to pay rent and not simply into the pockets of unscrupulous tenants? Having the private sector step in to get the money flowing to keep both tenants and landlords solvent is far faster and far more efficient than looking to government to do it. It’s the smart thing to do.
We call upon those with the means to make a real difference in the current crisis. It’s altruism at its best, but it’s also enlightened self-interest and good business. To the billionaires, we say: “You’ve made money. and now it can really matter.”
With a wealth of experience in tenant buyout agreements during every era and in every Bay Area locale, Bornstein Law is uniquely positioned to survey a patchwork of rules related to tenant surrender of possession agreements.
In a tenant buyout agreement or tenant surrender of possession agreement to be proper, the tenant volunteers to voluntarily vacate the premises in exchange for compensation, a waiver of rent, or both.
At first, these agreements were unregulated by Big Brother. During this period of laissez-faire, our offices were doing several tenant buyouts a week. Then politicians and regulators said that these contracts didn’t pass the smell test.
Fearing that tenants were bamboozled into handing over the keys without knowing the true value of their rental unit and wanting to keep track of how many buyouts were being inked in the shadows, rules were enacted to require landlords to provide a statement of rights to the tenant and give them the ability to mull over an offer and change their minds, even if they initially agree to the buyout agreement.
Have a willing taker that accepts the bait? Hold on.
Tenants also now have ample opportunity to consult with a tenants’ attorney or counselor to discuss their options and no means no – when a tenant turns down a buyout agreement, the owner has to wait a long time to broach the topic again. And localities want to know that the conversation is taking place, requiring owners to file paperwork with cities to bring these agreements into the light of day.
After new regulatory regimes were put into place, Bornstein Law continued to effectuate ethical, legal, and enforceable buyout agreements, but with onerous new rules, considerably less. Now with COVID upon us, we have been busy drafting these agreements because they are one of the few vehicles landlords have to transition tenants out of the unit.
So, it seems we have come full circle.
We were the engine of a lot of buyout agreements at first, only to see a decline after regulators put a damper on them, and now we are experiencing a surge. With buyout agreements back in vogue, Daniel Bornstein will be hosting an August 12th webinar on this topic. Some points to be discussed:
The confluence of factors in managing landlord-tenant relationships during the pandemic and in what circumstances a tenant buyout agreement might make sense.
Myriad disclosure requirements, rules and timeframes tenants have to rescind the agreement, taking time to explain the nuances in cities throughout the Bay Area
From start to finish, how to broach the topic of a tenant buyout agreement and negotiate the “just right” dollar amount and why, whenever possible, we like to stay behind the scenes of these negotiations and take more of an advisory role.
Why we often prefer tenant buyout agreements over owner move-in or relative move-in agreements (OMI/RMI) and why buyout agreements are sometimes mistaken for “cash for keys.”
We don’t say this in a braggadocio way, but we know of no other law firm that can explain tenant buyout rules across multiple jurisdictions in an easily digestible fashion. Our hard-won experience has given us the specialized knowledge to speak authoritatively on this subject, and we look forward to imparting our insights in this online event. To our knowledge, this is the first webinar of its kind and we invite you to join today.
Taking away a property owner’s right to evict is unconstitutional, it is being argued in the courts, and the law is on their side.
The pandemic has been incredibly difficult for everyone. Although the cunning virus doesn’t discriminate against anyone and doesn’t care if you are a property owner or a tenant, or what political persuasion you may have, somehow landlords have been asked to bear the brunt of these tough times.
Fearing catastrophic unemployment and a tsunami of evictions, it seems that lawmakers got together to enact measures that protect tenants at risk of displacement, but comparatively little protections have been put in place for landlords. Now, owners are starting to speak up and commence litigation.
Bornstein Law has said now is not the time to raise rents. Many localities have a wholesale ban on rent increases, but even in the case when a rent increase is permitted under Costa Hawkins, or when owners can use “banked” rent increases, we have said the optics of raising rents now are not attractive. Nor is it the time for municipalities to rewrite state law by depriving owners of their unlawful detainer rights, but that is exactly the goal of some lawmakers who have used the COVID outbreak to usher in sweeping new protections totally unrelated to the crisis. We are encouraged that by filing lawsuits, landlord groups have ensured that owners will get their day in court and there will be checks and balances.
In commensurating and empathizing with our clients, we have regretfully said we can’t see the light at the end of the tunnel. In our last webinar, Daniel gave some grim predictions that but for the most egregious of circumstances, landlords cannot expect to recover possession of the rental unit until far-flung in the future.
The light at the end of the tunnel may now come in the form of a barreling freight train of litigation we’ll examine here.
Christensen v. California Judicial Council
The California Judicial Council has a valuable role to play, for sure. The stated mission of the policymaking arm of the judiciary is to ensure “consistent, independent, impartial, and accessible administration of justice.” This 21-person panel composed of trial judges, state bar representatives, legislative representatives, appellate court judges, and the state supreme court is tasked with administrative duties. They set procedural guidelines to keep the courts operating efficiently, but it is far beyond their purview to legislate or weigh the interests of society. The judiciary cannot step on the toes of the legislature and make law, but it appears that is what the Judicial Council did in issuing emergency rule 1.
An imbalance in the separation of powers is at the heart of litigation filed by the Pacific Legal Foundation. One of the plaintiff attorneys embroiled in the case, Michael Spoon, explains all of their constitutional concerns in this webinar hosted by the Apartment Owners Association.
One of the most compelling arguments being made is that under the fiat of the Judicial Council, unlawful detainer actions are suspended for 90 days after the state of emergency is lifted. Surely, the Emergency Services Act gives the Governor extraordinary police powers to temporarily suspend certain statutes, but this authority ends when the state of emergency is lifted – all statutes must be restored when Governor Newsom’s Executive Order is rescinded. How, then, can the Judicial Council deprive rental property owners of their unlawful detainer rights under state law for 90 days after the emergency declaration expires? They cannot, submits the Pacific Legal Foundation.
“All of us are endeavoring to balance justice against this overwhelming contagion in order to minimize illness and death… We are at this point truly with no guidance in either history law or precedent, and to say there is no playbook is a gross understatement of the situation.”
California Supreme Court Chief Justice Tani Cantil-Sakauye
We applaud the good intentions of the judiciary to get ahead of a health crisis, but public policy cannot be made by this branch of government. At any rate, the unlawful detainer rights of owners should not be a casualty of the pandemic.
Evidence that the judiciary is making law is clear to see
The Judicial Council recommended on June 10 that the eviction ban should be lifted, but the top legal umpire, chief justice Tani G. Cantil-Sakauye, took exception. According to the Pacific Legal Foundation, she explained that she took the matter into her own hands because the legislature was not in session and there was no other functional arm of government to address a pending housing crisis.
As reported by the California Globe, Cantil-Sakauye’s refusal to lift the ban was influenced by low-income housing advocates and a UCLA study that warned of mass homelessness if landlords were allowed to evict. We can only conclude by the chief justice’s own remarks that the judiciary has seized the moment to not just set procedural rules for the court but to create their own laws to deal with the impacts of the pandemic.
The plaintiffs express confidence they will prevail when the case is heard in September. At issue, though, is whether the government appeals and whether the eviction moratorium is put on ice during the lengthy appeal process. Let’s cross our fingers.
San Francisco given an inch, takes a mile
A recurring theme we have seen throughout the pandemic is municipalities pushing the envelope by exploiting the pandemic to not just preserve housing in a time of adversity but advance a larger agenda of tenants’ advocates. A case in point is San Francisco, and we can draw a parallel with the separate lawsuit lodged against the California Judicial Council. That is, rules or ordinances cannot conflict with state law that gives owners certain rights to recover possession of their property.
In San Francisco, any rent that has gone unpaid during COVID cannot be used as a reason to evict. Instead, it is reclassified as consumer debt. In an earlier post, we mentioned that several landlord groups balked at this ordinance and filed suit, claiming that once emergency declarations are lifted, the City cannot usurp the unlawful detainer rights of rental property owners. The landlord’s right to evict is sacrosanct under state law. Granted, the Governor can temporarily suspend these rights in a state of emergency, but once orders are lifted, localities cannot deny owners their rights afforded under California law.
The lawsuit brewing in San Francisco will come to a head on July 30. The Judge initially refused to issue an injunction that would strike down the ordinance but set a later date to hear the case on its merits. We will keep you informed on the progress.
Landlords have been asked to make an inordinate sacrifice for the community, and they have not been as vocal as tenants’ advocates. We recommend you join a trade group, contact your elected representatives, call the radio shows, or otherwise let your voice be heard in this exercise we call democracy. Contracts matter, and when landlords and tenants enter into an agreement, that agreement should be honored. Please speak up and say so.
Bornstein Law is in the business of answering tough questions, but after taking a survey gauging the impact of coronavirus on the real estate industry, we were especially intrigued by one query, which essentially asked if there were any “unidentified opportunities” for property managers in the COVID crisis or lessons to be learned. This prodding gave us some pause, but before we impart advice, some background is in order.
First and foremost, rental property owners have shined through.
We have seen dramatic images of tenants protesting in the streets, and this makes for a sensational story. The rhetoric and images of tenants’ advocates you may see in the media serve to drown out a more optimistic narrative we have witnessed firsthand.
We can attest through our law firm and property management arm that tenants are paying rents and if they are short on the full amount, the vast majority of tenants are communicating with owners. In turn, studious landlords are, by and large, working out mutually agreeable payment plans.
It is the nature of the media – and perhaps the human brain – to fasten onto what is wrong and not pay attention to what is right. A visual fire of a residential building is much more interesting than a building sitting there nicely with residents in harmony and walking their dogs outside. The inferno will make the news, while the humdrum will not. Rent strikes are the proverbial burning building.
What goes unreported are the countless acts of owners who are exercising compassion in giving leeway to cash-strapped tenants. These landlords are not studying the patchwork of local ordinances that specify what documentation is required for a hardship. What documentation of hardship is required, and when it should be produced is largely irrelevant – they are not bogged down in legalese; they simply have a “heart to heart” conversation with tenants.
Internally, we haven’t polled our clients but for that, we turn to our friends at the Small Property Owners of San Francisco. In their May newsletter, the results are in for the pointed question of the month – how has the pandemic affected property owners? We are encouraged that these tales are being told, and what they reveal is not a wave of protest or conflict, but cooperation and empathy.
Let’s get to the root of the question: Are there “unidentified opportunities” amid the pandemic, and what can we learn?
In a word, it is retention. Clearly, rental property owners and operators do not want a revolving door of tenants, but responsible ones who reside for the long haul. Retaining good tenants is good for business in every season, but even more imperative now.
For the time being, the courts have essentially been grounded to a halt, and so barring egregious acts of rogue tenants who pose imminent threats to health and safety, it is not realistic for landlords to believe tenants can be transitioned out of the rental unit anytime soon.
It is the prerogative of the owner to commence an unlawful detainer action, but it will fall on deaf ears because of court closures. Keep in mind, owners will lose their unlawful detainer action if rent is accepted after the action is commenced. Accepting rent in the midstream of an eviction action is a cardinal sin that made our top five reasons owners falter.
Better to work out a payment plan and condense the understanding in a rent forbearance agreement, a document we will gladly assist in preparing.
It’s been said that a bird in the hand is worth more than two in the bush, but aside from receiving much-needed cash flow, now is a good opportunity to build rapport with tenants and ensure longevity with those who are temporarily distressed. We would be naive to say that all tenants will be appreciative of their landlords’ latitude in making payments, but a great many will.
And so, with long-term tenants even more valuable today, it’s vital to hold on to the residents you have. Communication has always been important in every season, but doubly so now. Whether by phone, email or text, communicating with them in the way they prefer to be communicated with is yet another signal you are trying to be a fair landlord or property manager.
Early on in the public health emergency, many rental property owners felt left to the wayside. With newfound police powers, many municipalities ushered in sweeping tenants’ protections and this patchwork of new regulatory regimes culminated in our Governor issuing a statewide moratorium on evictions for non-payment of rent cases.
While there were five-alarm fire bells going off for renters, would there be any reprieve for owners?
Forgotten landlords argued that while tenants face job loss and substantial reductions in income as the result of COVID-19, owners face financial obligations of their own. Mom and pop landlords are especially vulnerable without the cash or credit availability to cover their costs when rents aren’t paid. Daniel Bornstein told KPIX Five that penalties that arise when owners are late on their mortgage should be proactively waived across the board.
The collective moan of financially strained owners and operators were eventually heard in a patchwork of relief we’ll go over now.
Fannie and Freddie were prophetic in averting a large-scale crisis in the making by offering mortgage forbearances
Holding or backing approximately 48.6% of outstanding multifamily mortgage debt according to recent data, Fannie Mae and Freddie Mac were one of the first to throw a life preserver to landlords, but with a caveat. Owners could benefit from a mortgage forbearance on the condition that they suspend all evictions for renters who cannot pay their rent because of the coronavirus.
These government-sponsored enterprises understood that since they had no contact with individual renters, the only way to provide genuine relief to renters was to provide relief to the kings of the castles. Missed rent payments translate to an owner’s inability to pay the mortgage, all but guaranteeing the entire property would go into foreclosure. Rental property owners are encouraged to contact their mortgage servicer to inquire about what relief is available.
Governor Newsom brokers a deal with lenders for 90-day mortgage payment relief
On March 25, Governor Newsom announced that many financial institutions have signaled their intention to work with owners who are unable to fulfill their mortgage payment obligations. Onboard is Citigroup, JPMorganChase, U.S. Bank, and Wells Fargo, along with nearly 200 state-chartered banks, credit unions, and servicers.
Specifically, the deal would defer mortgage payments for three months, although borrowers have the opportunity to request additional relief. There is also a pledge not to initiate foreclosure sales or evictions for the next 60 days. Another promise: not to report late payments to credit reporting agencies. Late fees will also be waived.
Select lenders have also implemented deferral plans during this declared emergency, allowing borrowers to put a hold on their payments for up to 120 days. These deferred payments will be applied at the end of the borrower’s loan period. Bank of America was a bit of a pariah – it would only agree to 30 days.
If owners are experiencing a drought in rental income, they are well-advised to reach out to their mortgage servicers regardless of who they are or where they fit into the scheme of the Governor’s deal. After weathering the foreclosure crisis of yesteryears, Bornstein Law can attest that lenders are generally willing to work out a solution with borrowers falling on tough times, as there is no upside for a bank to foreclose on a property. Communication is key.
Landlords attempt to find Uncle Sam to benefit from the federal stimulus package
PPP is a $350 billion tranche designed to divert an employment crisis by helping businesses maintain their payroll. Run through banks and credit unions, PPP infuses up to $10 million in loans to companies with 500 or fewer employees. If businesses avoid layoffs, some or all of the loan could be forgiven.
Many rental housing providers, however, have been left on the sidelines because of the interim final rule, which essentially says the payroll of third-party contractors is not calculated in the size of payroll. This is problematic because clearly, although landlords rely heavily on management companies and independent contractors, Section 1102 of the CARES provides that the maximum amount available under the PPP is equal to the lesser of $10 million or 2.5 times the “average total monthly payments by the applicant for payroll costs incurred during the 1-year period before the date on which the loan is made . . .”
Multifamily hasn’t been cut out completely so much as it has been seriously limited by provisions of the SBA Paycheck Protection Program. Many sectors of the industry, such as residential property management companies with multiple physical locations, passive owners, apartment buildings and those who contract third parties for property management are currently ineligible per SBA guidance.
We hasten to say that while landlords cannot include payments to certain third parties as payroll costs for the purposes of a PPP application, they do benefit indirectly through PPP loans obtained by their tenants. With owners and operators limited in their ability to obtain direct relief through PPP, let’s move onto a more advantageous, less-publicized program for landlords, namely the Economic Injury Disaster Loan.
Economic Injury Disaster Loan, or EIDL.
Section 1110 of CARES significantly expands this program, which permits the Small Business Administration to grant loans of up to $2 million at a statutorily-capped interest rate of 3.75% and a term of up to 30 years. One component of the program is a shot in the arm of up to $10,000 in immediate funds “within three days” that, under most circumstances, doesn’t have to be paid back. This effectively makes it a grant, versus a loan.
These funds can be used for mortgage payments and other debts and so a hypothetical landlord who does not employ many people but has a substantial real estate portfolio can benefit greatly from an EIDL and receive a forgivable cash infusion to pay their mortgage, utilities, and other operating and maintenance expenses, without regard to the size of payroll.
These dual programs are not exhaustive
SBA Express Bridge Loans are meant to give quick cash of up to $25,000 to small businesses that have a business relationship with an SBA Express lender. The agency is also advertising a financial reprieve through debt relief afforded to businesses who already have an SBA loan and have suffered a financial impact in the wake of the pandemic.
The early report card is in, and it is one of frustration among owners and operators competing with many other businesses clamoring for funds. The East Bay Times tells the stories of many owners who are running into one brick wall after another in the application process.
This exercise is worth pursuing, however, with the same patience and discipline that is already the order of the day. Any red tape, delays, or lack of guarantees only serve home to drive home our advice to communicate with the tenant about their circumstances and work out a mutually agreeable payment plan. Bornstein Law stands ready to facilitate in that dialogue.