Last weeks post I discussed my concerns about AB 828, a bill that introduces moratoriums on both evictions and foreclosures during the remainder of the Covid-19 pandemic. The combining of these moratoriums — one for renters and one for property owners — as well as specific text within the bill, suggests that by combining these together, lawmakers hope to make it more acceptable by acknowledging the hardships faced by both sides:
The Legislature’s intent [is] that the common economic hardship resulting from the COVID-19 virus is not the fault of any one person or group of people and so must ordinarily be born by both landlords and tenants. Proposed addition to the Code of Civil Procedure, Section 1174.10 (d)
Despite the suggestion of compromise, however, this bill puts the burden squarely on landlords.
How Would AB 828 Affect Landlords?
The bill would severely limit a landlord’s ability to evict a tenant under any circumstances, particularly for nonpayment of rent. It would give tenants named in an unlawful detainer action the right to request a hearing in which they can claim economic hardship due to Covid-19 as the reason for their nonpayment of rent. If the landlord can provide no evidence to the contrary, it would be assumed that this was a Covid-19 hardship.
If it is determined to be a Covid-19 hardship the landlord must demonstrate to the court that they would face their own economic hardship if the rent on the unit in question was decreased by 25% for the next 12 months. If the landlord can’t demonstrate this, then the following would apply:
- Tenant would remain in possession
- Rent would be reduced by 25% for the next 12 months
- Tenant would be required to make monthly rent payments by the 5th of each month amounting to the reduced rent plus 10% of past-due rent
Are There Exemptions for Small Landlords?
The bill states that for landlords who own only one or two rental units, it would be assumed that the 25% reduction in rent would cause economic hardship. This is in contrast to another assumption, which is that owners of 10 or more units would face no such economic hardship from the reduction. For everyone in between, the court would decide on a case by case basis.
What if a Tenant Misses the New Monthly Payment?
If, after being granted a 25% reduction in rent, a tenant still fails to make timely payment in the new amount, a landlord may then give them notice and wait 48 hours, after which the landlord may file a declaration with the court requesting immediate possession and a judgment in favor of the landlord in the amount of the past-due rent plus court and attorneys fees.
How Long Would This Law Be in Effect?
The bill provides for these additions to the law to apply as long as any state or locally declared state of emergency is in place related to Covid-19, and up to 15 days thereafter. The bill sets an absolute repeal date on these additions of January 1, 2022, but there would have to still be an active Covid-19 state of emergency in place for it to extend that long.
How Will AB 848 Affect the Real Estate Market?
Let’s start with the obvious. This is a stealing of private property rights and I cannot imagine it NOT being challenged all the way to the Supreme Court. California is a liberal state but this is WAY out there and would cause more harm than good to our economy and society. Most landlords are small operators who count on their income to live. This will harm every single property owner in California, especially those with debt. A 25% rent reduction equates to a 25% value reduction as income property is valued by rents. Owners with 25% or less equity will simply walk away from their property and turn the keys over to the bank.
Replay: Savings and Loans Crash of 1986 when the tax laws were changed and syndicators handed over the keys to large commercial buildings that no longer made economic sense. I remember that fall out well. It’s when I launched the REO department for Grubb & Ellis commercial as we had a tsunami of commercial foreclosures which carried into the residential market. It is also when I launched Foreclosures.com. This time it will be residential income property that gets crushed. And there will be a huge ripple affect for home owners who get caught in the down draft when home prices are cut to match investor fire sales. It’s not pretty and I pray this bill doesn’t make it.
Is There Any Alternative Legislation Being Proposed?
While AB 828 is further along in the drafting process, there is an alternate bill being worked on in the state senate that now has the support of the California Apartment Association. SB 1410 by Senator Lena Gonzales (Long Beach) takes an approach more favorable to landlords in which the state would cover up to 80% of the monthly rent for tenants facing economic hardship due to Covid-19. In exchange, participating landlords would have to agree not to raise rents for a specified period of time, charge late fees on past-due rent, or pursue any remaining rent owed for the months paid by the program. More on this in my next post.
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