SB 939 (Wiener) is the poster child for a feel-good perception of a solution that would result in far greater economic harm than we are already experiencing. Veiled under the guise of helping restaurants and small businesses in response to the COVID pandemic, the truth is its passage would lead to a domino effect with monumental economic consequences including more business closures, more jobs lost, widespread property foreclosures and even less revenue for local and state coffers. The bill should be rejected by the Senate Appropriations Committee when it comes up for a vote June 18.
SB 939 would allow businesses large and small to withhold rent indefinitely regardless of how profitable they are and creates a new, special protected class of businesses that can to walk away from lease obligations altogether, transferring the debt to the property owner. While the bill has been characterized as applying only to restaurants and select small businesses, it in fact applies to virtually all California commercial leases.
Yes, small businesses are suffering due to the coronavirus, but SB 939 fails to recognize that property owners throughout the state are still expected to pay their mortgages, utilities, property taxes and other expenses and they’re doing it now with vastly reduced rental income.
Contrary to some perceptions, the vast majority of property owners are not deep-pocketed corporations. Many have the same or less annual revenue than the businesses that SB 939 is aiming to protect. It is simply unrealistic to expect any company to cover the contractual debt obligation for another for an extended or undetermined amount of time. And, banks and mortgage holders will undoubtedly call loans into default resulting in a glut of unoccupied space and another mortgage crisis.
According to the Small Business Association, nearly 41,000 real estate companies in the California shopping center industry alone have fewer than 20 employees. And just that sector of the industry has already lost $3.5 billion in rent revenue, resulting in less tax revenues for communities. CalPERS and CalSTRS also own millions of dollars’ worth of commercial property; it is these investments providing retired California workers and educators an income and health care.
SB 939 also creates a new, special protected class of businesses that can walk away from lease obligations altogether, transferring the debt to property owners. And for the purpose of this new class, the bill establishes a new definition for “small business” – up to 500 employees – which is five times larger than the state’s current definition.
Fundamentally, SB 939 is based on the faulty premise that property owners somehow benefit from evicting their renters when in fact the exact opposite is true. Nobody wants an empty building. And trying to find new tenants is far more costly than finding creative ways to keep current tenants. Most property owners are working with their renters and tenants throughout the state to provide relief while keeping them in their spaces.
Everyone in the state benefits when restaurants and other small businesses are able to bounce back from the economic harm of COVID-19’s Shelter in Place orders. But the legislature must look past the headline appeal of SB 939 or it will result in far greater consequences.