One Year In, How Have Commercial Eviction Moratoriums Changed The CRE Landscape?
A year has passed since many coronavirus-spurred emergency rules were implemented, including moratoriums on commercial evictions that will expire in less than four months.
Normally, state law does not allow cities and counties to regulate commercial evictions, but, citing the public health emergency posed by the coronavirus pandemic, Gov. Gavin Newsom signed an executive order in March 2020 allowing them to do so. The city of Los Angeles, LA County and a number of other cities across the state subsequently implemented eviction moratoriums to protect commercial tenants.
The expiration date of the state executive order has been extended multiple times throughout the last year. Newsom's order was most recently extended last week to June 30. It is unclear whether it will be extended again and, if so, for how long. But one year in, landlords and tenants offer mixed reviews of the impacts of the moratorium on their businesses.
In the past year, residential and commercial moratoriums have faced legal challenges from property owners. In January, the owner of a Lawndale auto shop sued to overturn the LA County moratorium on commercial evictions. The owner said although his tenant’s business has remained open throughout the pandemic, the tenant owes thousands of dollars in back rent and cannot be evicted. The case, which the owner’s representation at the Pacific Legal Foundation said is the first challenge to a commercial eviction moratorium in the country, is still pending in court.
Many businesses across industries have remained open during the pandemic but are not making their usual profits. For them, rent is accumulating to dizzying levels.
There was a lot of confusion early in the pandemic when these moratoriums were first being implemented. Now, there isn't as much confusion about what the protections are, but Cox, Castle & Nicholson partner Corin Korenaga said he does still encounter people who are unsure of how and to whom the protections apply.
"We still get questions from landlords whose tenants need help — maybe they didn't need help last year but they do now," Korenaga said. "We get similar questions from tenants as well. Sometimes it's not intuitive how these city and county statutes interact with each other."
Greensfelder Commercial Real Estate Managing Principal David Greensfelder said he has seen many examples of commercial tenants trying to take advantage of the existence of the moratorium to obtain concessions beyond what their financials showed they actually needed. But he has also seen it come in handy for some tenants who are in dire straits.
“There are tenants that are just getting hammered,” Greensfelder said. “Even for a well-capitalized tenant, this is beyond the scope of contingency planning — beyond the scope of the quote rainy day fund. Nobody has a rainy year fund.”
Landlords have a lot of incentive to work with tenants, as they aren’t necessarily going to be able to backfill any space that a booted tenant would leave behind during a pandemic, Greensfelder said.
That seemed to be the situation for Downtown LA restaurateur Bret Thompson. While he doesn’t know if the moratorium was the reason for the landlord’s willingness to work with his eatery, he said he doesn’t think it was.
Within a month or so of the lockdown in March 2020, a neighboring restaurant tenant of Pez Cantina, which Thompson runs with his wife, Lucy Thompson Ramirez, folded. He thinks the loss of that tenant created a sense of urgency for his landlord to work with his business.
“It couldn’t be any more difficult for an industry than it is for restaurants,” Thompson said. “Quite frankly, if our landlord had really pressed and said, ‘Pay your entire rent or else you’re out,’ we wouldn’t be here right now.”
Although indoor dining is not yet allowed in LA County, outdoor dining reopened in late January, and Thompson said the restaurant, which has a large outdoor patio, has been able to hit 60% to 70% of its normal business levels.
Retail landlord and property manager Vestar has spent the last year hammering out lease amendments for tenants who are struggling to make it through the pandemic, though its associate project director, Ryan Ash, said moratoriums in California haven’t been a factor in that.
Across Vestar’s portfolio, which includes properties in California, Arizona, Colorado, Nevada, Texas, Utah and Washington, the company has negotiated lease amendments for 2,200 of its 2,800 tenants.
Regardless of any extensions of legislation allowing for California municipalities to continue their eviction moratoriums, "[w]e will continue to work with our tenants that continue to be negatively impacted by the current government operating restrictions,” Ash said in an email.
Landlords remain in a tough position of trying to reconcile the needs of their commercial tenants with the demands of their lenders. Reports of lenders becoming increasingly aggressive about foreclosing on retail properties that had gone months without paying their mortgages are not uncommon.
Companies new and established have put together funds expecting to capitalize on a wave of distressed properties as a result of Covid. Over the summer, LA-based BH Properties launched a $200M fund anticipating “‘a dramatic and troubling increase in defaults, foreclosures, receiverships and bankruptcy filings across the country once commercial eviction moratoriums expire,” according to a July Commercial Observer story.
Or, as Greensfelder, put it, “What’s going to happen when the music stops?”