Wednesday, April 4, 2012

CA SB 1191 -- A Cure or More Big Brother?

SB 1191 has been introduced in the California Senate. It would require every landlord who is in default under a mortgage or deed of trust and who has received a notice of sale, to disclose the notice of sale to any prospective tenant prior to executing a lease agreement for the property. The bill would also provide that a violation of those provisions would invalidate the lease and entitle the tenant to recovery of “all” rent paid under the lease.

Granted, I have heard of past abuses by absentee landlords that may be valid causes to enact legislation to protect renters of single family homes but to include all landlords is a much more serious issue. When viewed on the macro-economic level, however, SB 1191 assumes an over-reactive, over-protectionist, “big brother” stance by imposing actions to cure ills in the single family residential sector on a much more complex commercial environment that operates by a completely different set of rules. And quite frankly, it’s extremely counter-productive to this struggling market.

Let’s look at this from an investor’s perspective: as an owner of a building, there are many reasons I could get into a default situation, and not because I may be trying to negotiate with my lender (though this does happen, but not often). I may well have a legitimate issue with my lender who could take a hard stance and slap me with a default. Under this proposed legislation, I would have to tell all of my tenants and prospective tenants about the default. What then are my chances of maintaining my building? Not very good. This could create the complete devaluation of my building, to a point that in all likelihood, I couldn’t recover.

And what about maturity defaults – I’m current but my loan is due and I can’t get refinancing. Having to notify my tenants and prospective tenants would turn a maturity default into a real default with ensuing consequences of serious devaluation and deterioration of commercial properties.

This proposed legislation is also a disaster from the lender’s perspective. Let’s say the building is half leased and needs an investment to bring it up to par. The note holder isn’t paying the lender; should the lender put him in default? If it does, it’s going to drive away existing tenants and not even get to first base with prospective tenants. The lender is, in essence, destroying the security in its own asset and should be very reluctant to enforce their rights under the terms of the loan.

It’s not often that investors and lenders have the same point of view on an issue but in this case, this proposed legislation is damaging for both groups. The last thing we need is more, empty buildings which this legislation would surely help achieve.

We all understand that the government is trying to protect renters; and granted, there are some “victims” out there who do need protecting, but the pendulum has swung too far with this bill. This over-reaching and over-reaction by government would create a new crisis in an already fragile environment. Let’s hope that appropriate limitations will be written in to this legislation to help maintain a market that is showing signs of recovery.

Gil Priel is Managing Director and Principal of the Peak entities. Gil Priel has been involved in the real estate industry since 1978, starting with the private equity acquisition and management of several office buildings in the Los Angeles area.

Priel has worked in all phases of the real estate industry including land development, management, financing (portfolio lending for commercial and residential properties plus non-performing debt acquisition and broken development cycles) and disposition of all product types. His expertise in distressed real estate has spanned many cycles. Priel has been a guest speaker for many media outlets and publishes a monthly real estate newsletter. Priel has his BA from California State University, Northridge and a Juris Doctorate from Southwestern University School of Law.


Gil can be reached at gil@peakcorp.com.

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