On March 16, Governor Gavin Newsom signed Executive Order N-28-20 with much fanfare, paying homage to COVID-19 and declaring an emergency in California and worldwide. His order recommended that local jurisdictions follow the state’s lead and do two things:
- Enact a moratorium on tenant evictions for commercial and residential properties if tenants can prove financial hardship resulting from COVID-19, and
- Enact a moratorium on foreclosures of commercial and residential properties if property owners can prove financial hardship resulting from COVID-19.
While on the surface this may seem a reasonable course of action, I think Newsom failed to recognize the long-term impact of such a drastic move. To be sure, if these laws are enacted locally, they won’t alleviate anyone’s long-term responsibility to pay rent or interest. They will simply postpone payment until after May 31, 2020 (or later if the date is extended).
The thing Newsom overlooked is this: tenants who are least able to afford a big financial hit will be hit the hardest on June 1 when they are forced to pay three months’ rent. Rather than tightening their belts and making rent payments each month, now they’ll have to come up with triple that amount. Same goes for property owners.
Moving to the next level in the economic cycle, landlords with no rental income for April and May may not be able to afford their mortgage payments, eventually leading to foreclosure. I anticipate this new law, if enacted in Mendocino County, will ultimately increase evictions, foreclosures, and bankruptcies. Certainly, the law would lead to higher costs for everyone as lenders and property owners hire lawyers to evict and foreclose on non-payers, and to protect themselves against unscrupulous people who would take advantage of this law, falsely claiming financial hardship even if COVID-19 didn’t affect their pocketbooks.
Sadly, more subtle impacts of this law are also missing from the Governor’s radar—such as reducing the desirability of owning rental property in California. This newest assault on private property rights is just one more on a long list of recent assaults. The government is sending a clear message to California landlords: we don’t want you here.
As well-intentioned as this executive order may be, ask yourself these questions:
- Do we have a housing shortage?
- Is the law more likely to increase or decrease investment in the housing market?
Let me help you out. Yes, we have a housing shortage, and this law is likely to reduce investment in the housing market when we need to increase it. The bottom line is that Newsom’s executive order exacerbates the housing shortage.
As a property manager, I can tell you that many people who rent already pay a substantial percentage of their income toward housing. The idea of having them pay a lump sum to catch up on back pay, or even to pay it off over several months, isn’t realistic. An increase in rent as small as 10 percent would force many tenants out of their homes.
And philosophically, I am curious why landlords are expected to carry this weight. If everyone believes that renters should be allowed to stay in their homes and businesses should be allowed to remain in their properties regardless of their ability to pay during this pandemic, then shouldn’t everyone help make it so? I know landlords who are not the fat cats people believe. I know one woman who rents her father’s home to pay for her father’s care in a skilled nursing facility. She should not have to pay her tenant’s costs associated with COVID-19 just because she is his/her landlord.
I recognize that our economic system isn’t perfect, but it’s pretty efficient at handling economic downturns. To me, it just doesn’t seem fair that landlords should have to subsidize an unfair portion of the expenses associated with COVID-19.
If you have questions about property management or real estate, please contact me at email@example.com or call (707) 462-4000. If you have an idea for a future column, share it with me and if I use it, I’ll send you a $25 gift certificate to Schat’s Bakery.
Dick Selzer is a real estate broker who has been in the business for more than 40 years.