Landlords And Tenants Alike View Commercial Rent Debt With Trepidation
There has been much bracing for and discussion of an impending wave of evictions that some expect to follow the end of the residential eviction moratorium in the city of Los Angeles and other statewide protections for residential tenants, but less broad attention paid to the city’s concurrent commercial eviction moratorium.
There is no official date yet for the end of the moratoriums, but as the daily case counts for Covid-19 decrease in the LA area and masking and vaccination proof requirements are rolled back, city officials are preparing for the eventual sunset of these regulations.
Current guidance from the city says tenants will have three months to pay back any rent debt after the moratorium lifts and then may face eviction. With tenants often owing tens of thousands of dollars in back rent from two years of deferrals and in many cases only recently starting to see income rebound, a wave of commercial evictions may be looming that can only be averted by tenants and landlords coming to terms beyond what the rules require.
City leaders are exploring what can be done to help small businesses, which make up an estimated 96% of businesses in the city, to get on top of the back rent they owe. Business owners, lawyers and landlords who spoke to Bisnow say the most effective form of aid tenants could receive from the city is money.
It is hard to know exactly how much money is needed. A report from city staff aimed at finding ways to help small businesses bounce back from the pandemic used data from the city, the county and Los Angeles City Council District 4 to attempt to ballpark the amount of rent debt that LA’s small businesses might have. Their findings ranged broadly.
One city source indicated that average rent debt for small businesses that applied for a city program hovered around $4K. Another survey of businesses in District 4 — which includes parts of Silver Lake, Los Feliz and the Hollywood Hills as well as parts of the San Fernando Valley neighborhoods of Sherman Oaks, Encino and Van Nuys — found that the majority of the 81 respondents had more than $40K in rent debt.
Greenberg Glusker partner Lee Dresie said three months is insufficient time for many businesses to repay the money they owe.
“[Landlords] are going to have to make a decision whether to enforce the strict requirements about repayment or make a decision that they want the tenant to survive, and therefore, give them more time,” said Dresie, whose clients are both commercial landlords and tenants. “But that'll be on a case-by-case basis.”
Some of the factors his landlord clients are weighing when considering whether to negotiate with a tenant include whether the tenant is paying a below-market rent, their history as a tenant prior to the pandemic, and long-term projections for that tenant’s success, Dresie said.
Josh Farahi, a partner at Greenbridge Investment Partners, said that while the majority of his tenants didn’t need to negotiate rent repayment plans with him to stay current on their rent, he did arrange agreements with the few who did. He did not share the average amount of rent debt tenants owed his company, but he did say the terms of agreements Greenbridge has negotiated often spread the payments out over a period of years.
Greenbridge’s portfolio in the LA area is mostly office with some ground-floor retail, but tenants include medical offices, lawyers, other traditional office tenants and retailers. Business is largely back to normal for his tenants now, but “normal” might have started very recently, like after the omicron variant died down, he said. Farahi estimates that roughly 10% to 15% of his tenants needed payment plan-style help that would allow them more time to repay what they owe.
“Smart landlords don't want to bust up to their tenants,” Farahi said. “That's not the point of being in business. The point of being in business is to have longevity, and to have longevity, your tenants have to be strong and survive and thrive.”
Dresie said some tenants simply won’t be able to pay what they owe without help, and the most useful thing the city can do is to offer some kind of financial remedy, whether that is money to cover those losses or something else monetary, like property tax forgiveness.
Some assistance from the city is on the way, the small business-focused city report noted. The city report recommended reallocating a $1.25M community development block grant so that money could be used to “provide legal assistance to income-qualified small businesses for lease renegotiation, debt negotiation and other services.”
An approved and forthcoming rental assistance program for small businesses in LA is part of a series of relief efforts approved in June. The program would provide grants of up to $15K or six months’ rent, whichever is less, for approximately 800 businesses — a fraction of the city’s estimated 128,784 small businesses.
Tricia La Belle, who owns restaurants and bars in Los Angeles, was holding out hope for a second round of the federal Restaurant Revitalization Fund but so far it hasn’t materialized. La Belle says she owes a six-figure amount of back rent on one of her businesses.
Business is back at 100% of pre-pandemic levels for La Belle, but new challenges atop rent debt have appeared, including rising costs for the things she serves at her establishments as well as staffing challenges. In a business that regularly averages single-digit margins, La Belle is not hopeful that she can make a dent in what she owes.
“I will never be able to pay that back,” La Belle said.
La Belle says the only meaningful thing the city can do for her is to connect her with funds that can help her pay down what’s owed not just to her landlords but to vendors and for utilities.
La Belle, who is president of the Greater Los Angeles Hospitality Association, said she isn’t alone.
“For everyone I’ve talked to, business is fantastic,” La Belle said. “They are right back to pre-pandemic business levels as far as income, but their debt is high.”
Of course nothing will completely prevent evictions after the moratorium lifts as landlords weigh tricky business decisions and look to oust bad actors. Farahi said for some of his tenants, serious action is needed. A select few tenants have not operated in good faith and have used the eviction protections “in a dishonest way,” Farahi said. In those cases, he won’t rule out pursuing eviction, even though it means having to find new tenants to fill those spaces.
“We're not overly concerned about losing tenants, but that being said, this is not the environment right now to try to replace tenants,” Farahi said. “We're not overly excited about having to re-lease things.”