To begin, I have insider news from a reliable source – Assembly Bill 828 (the bill proposing a 25% court-mandated rent reduction) was withdrawn by its author. It may resurface later, but for now it’s good news. No one wants to see the state’s homelessness and affordable housing crises grow during these times, but the methods proposed in AB 828 clearly provoked questions about its constitutionality:
Article 1, Section 10, Clause of the United States Constitution, known as the Contract Clause, imposes certain prohibitions on the states. These prohibitions are meant to protect individuals from intrusion by state governments and to keep the states from intruding on the enumerated powers of the U.S. federal government.
In response to these concerns the California Apartment Association sponsored a legislative proposal that would help both landlords and renters endure the financial difficulties brought on by COVID-19. Under SB 1410 by Sen. Lena Gonzalez, D-Long Beach, the State would make direct rental payments to help tenants who cannot afford to pay their rent. SB 1410 would cover at least 80% of unpaid rent attributable to the pandemic.
What is SB 1410?
The bill calls for the creation of an Emergency Rental Assistance Program to help cover 80% of a tenant’s missed rents for up to seven months.
Who Would Be Eligible to Participate?
To be eligible, the following conditions would need to be true:
- The tenant can demonstrate their inability to pay rent between April 1, 2020, and October 31, 2020, is due to Covid-19
- The landlord has agreed to participate in the program
What Would Participating Landlords Be Agreeing To?
In exchange for getting the state to guarantee payment of 80% of the missed rent for seven months, landlords would have to agree to the following rules of the program:
- The 80% payment must be considered a full payment, meaning landlords would be giving up their right to collect the remaining 20%
- Rent on the unit cannot be raised until December 31, 2020
- Late fees cannot be charged for missed rents between April 1, 2020, and October 31, 2020
How Would the Program Be Funded?
This remains the biggest question, and the current version of the bill does not yet offer much clarity. A recent article from CalMatters estimates such a program could cost the state around $2 billion, and suggests that some of that may be able to come from redirecting funds previously approved for addressing homelessness and housing development. Still, compared to the alternative of AB 828 or even more extreme talk of complete rent forgiveness, landlords are showing favor toward this type of approach.
Will Any of These Emergency Orders Actually Help?
Current emergency orders and government regulations enacted to date have started to emboldened renters to not pay rent whether they can afford to or not. Many have chosen not to pay and owners cannot do anything about it. I expect lawmakers will continue to expand repayment plans for deferred rent in favor of renters, put greater restrictions on evictions, and extend the current eviction moratorium from 12 months to up to two years..
Landlords groups are calling on the state to defer or delay property taxes; create a tax credit system that incentivizes owners to provide rental assistance to tenants; and create a framework that allows landlords to receive mortgage payment relief when they provide rental relief. I am hopeful that landlords will receive some much needed relief.
How Will SB 1410 Affect the Real Estate Market?
Aside from the big question on who will fund SB 1410 – I wonder if landlords can even afford a 20% reduction in rent for seven months? They still need to pay their mortgage, taxes, insurance, utilities and maintenance. Where is that money going to come from? In addition, many live on their rental income as a source to put food on their table. With negative cash flow; no way to recoup the missed payments; 20% unemployment and growing – I don’t see an easy path going forward for California landlords.
By ignoring landlords needs, there will be no one left who will want to invest in California rental properties. It’s far easier to put money in rental property out of state, or commercial properties such as self-storage, medical office or single tenant drug stores – than to have to take late night calls to fix a stopped up sink on a negative cash flow property.
Those who cannot hold on will put their properties on the market as reality sets in. Hopefully sooner rather than later, before their equity is wiped out. The domino affect will be an increase in inventory and softening prices – all at the same time later this year. Unfortunately we will see an increase in mortgage defaults and foreclosures.
Your best solution may be to capture the equity you have now, while inventory is low and prices are still strong. I HIGHLY recommend you reach out to me or my team ASAP so we can work through your best options.
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