SB 1410 & Unpaid Rent

“SB 1410 proposes to void any demand for the payment of unpaid rent, or any notice to terminate tenancy served, that has accrued during the State of Emergency due to Covid-19.”

$1.4 billion dollars a month is the estimate that the State Franchise Tax Board estimates will not be paid to property owners during the State of Emergency relating to COVID-19 that began in March 2020 if SB 1410 (Caballero) becomes law.

Let’s look at what the bill proposes to do now that we have your undivided attention.

SB 1410 proposes to void any demand for the payment of unpaid rent, or any notice to terminate tenancy served, that has accrued during the State of Emergency due to Covid-19. Any rental property owner who desires to serve an unlawful detainer on a tenant who has failed to pay rent during this period will be forced to sign and offer that tenant a COVID -19 Eviction Relief Agreement in order to exercise the use of unlawful detainer.

This Agreement is unilaterally optional for tenants only but is mandatory for any rental property owner who wishes to file an action for unlawful detainer due to non-payment of rent during the State of Emergency. The Agreement allows a tenant to defer unpaid rent and would prohibit the owner from serving a notice terminating the tenancy or filing a complaint for unlawful detainer for that unpaid rent during and for an additional period of up to an unspecified number of days following the State of Emergency. Repayment of the unpaid rent would be made to the State of California beginning in 2024 and ending in 2034. Rental property owners would be eligible to receive any reimbursement in the form of a State tax credit from 2024-2034.

The bill does not address consideration of costs associated with the operation of any rental unit/development until an owner files their income tax return for 2024. Then and only then an owner may recover 10 percent of the unpaid rent per year.

Many experts believe that owners will be foreclosed of the opportunity to receive any additional compensation for uncollected rent accrued during this period unless they sell the State tax credit at extreme discounts, leading to greater diminution of value of the property and sums that property owners require for efficient operations.

Should SB 1410 be signed into law the impact will be severe and immediate. Owners, not unlike any business, will not be able to wait 14 years to be repaid for debt owed (rent). The bill will result in a strong likelihood of bankruptcy, foreclosure, lack of maintenance, and a general inability to deliver quality rental housing.

Here is what the Assembly Judiciary Committee analysis states as the reason for the bill:

“The main strength of the bill is that it would protect against widespread evictions during a pandemic, while providing future compensation (starting in 2024) to landlords for their present losses (the payment of today’s rent)…. SB 1410 also keeps landlords (particularly small landlords) from falling into foreclosure by providing them with refundable tax credits in exchange for missed rent. These tax credits can be redeemed in annual increments during the 2024-2034 tax years or can be sold by the landlord (and can only be sold once) at any given time.”

In our opinion, rental property owners cannot wait 14 years to be repaid for today’s rent.

Essentially this bill will require a rental property owner to sustain operations for a four-year period, with no stream of income to provide for the expenses related to upkeep, maintenance and/or operations. The only provision contemplated to relieve the owner from this burden is a proposal that the owner may sell the tax credit at a discount amount that would extremely devalue the present value of the financial instrument.

According to our experts on low-income housing tax credits, there is no current market, no parallel, will disproportionally adversely affect small property owners.

The proposed plan for rental property owner reimbursement is impractical and does not make reasonable provisions for the realities of operation and maintenance of a rental property. Without a subsidy provided that will act to supplement the loss of vital income, a rental property owner who experiences default by multiple tenants will be ill-suited to sustain the hardships of continuous operations. The ability to economically withstand a loss of income from multiple tenants will be an onerous burden, and few rental housing providers will be situated to withstand the strain for the four-year period, until the time in which the tax credit may be recovered.

If SB 1410 truly existed as a lawful mechanism, it would allow low- and moderate income households to remain in possession that have provided verification to owners that they are adversely affected and provide an effective financial repayment mechanism that would not crush owners.

As of the date of this article, the bill is one of two measures that seek to bar evictions due to the nonpayment of rent during the entire time of the State of Emergency. Do we know what day, month and year the Governor and local governments will determine that it is safe to lift the State of Emergency? Of course not!

Ron may be reached at Ron@CalStrategic.com