Foreclosing on Rental Property

Questions have been asked on the rights of a tenant when their landlord loses their property through foreclosure.  Below is an informative Legal Q & A from the California Association of Realtors Legal Department.

-Burt

I. Introduction
When a lender begins a foreclosure, parties involved with the property in foreclosure may be uncertain as to how the process affects them. Not only are lenders often unaware of their rights and obligations, but borrowers (sometimes also referred to as "owner" or “mortgagor”) who are faced with losing ownership of property also are frequently lacking knowledge about the limit and extent of some of their basic responsibilities and rights.
When the foreclosed upon property is a rental, tenants are unwittingly forced into a position of uncertainty concerning their contractual and legal rights and duties. If the rental is managed by a real estate broker, yet another party may feel strained by the tension and possibly competing demands of the property owner, foreclosing lender, and tenant.
This legal article addresses some of the major issues faced by property owners, lenders, tenants and property managers involved with a foreclosure on rental property. Certain topics will not be addressed, such as the steps in a foreclosure, the circumstances under which a deficiency judgment may be obtained (see legal articles, Deficiency Judgments and California Law and Deficiency Judgment Chart), and discharge of indebtedness and other issues involved in a short payoff (see legal article,Short Sales), as these issues are germane to all foreclosure properties. Instead, the primary focus will be to highlight those areas of concern unique to rental properties.

II. Lender Issues

A. Lender Issues with the Owner

1. Rent Skimming

Q 1.  What is rent skimming?

A  Foreclosures typically take place because a borrower does not make required payments pursuant to the loan documents. Foreclosing lenders are bound to be frustrated by an owner who is collecting rents yet not paying a loan. These lenders may want to try and stop the borrower from taking what they perceive as money which is owed to them. After all, isn't this rent skimming? And, isn't rent skimming a crime?

Rent skimming is defined as using revenue received from residential real property any time during the first year after acquiring the property without first applying the revenue to payments due on deeds of trust encumbering the property (Cal. Civ. Code § 890). Criminal penalties of up to one year in jail or up to a ten thousand dollar fine or both exist for rent skimming (Cal. Civ. Code § 892).  Thus, if it isn’t the first year of ownership, this remedy doesn’t apply.

Note:  There is also an “equity skimming” federal law; however, it is limited to residential one-to-four unit properties in default at time of transfer or in default within one year of transfer and those which are HUD properties, have HUD insured loans, or have VA loans. This federal law also requires a “pattern or practice” of purchasing such properties with an intent to defraud. (12 U.S.C. § 1709-2.)

Q 2.  What can a lender do, if anything, to respond to an owner engaging in rent skimming?

A  The decision of whether to pursue criminal action is in the hands of a government prosecutor (and outside the scope of this article). If rent skimming is involved, a lender can bring a civil action against the borrower for damages, costs, and attorney's fees. The court has the authority to also award exemplary (punitive) damages. (Cal. Civ. Code § 891(c).)

If the lender was a seller who carried back a loan (i.e., seller financing) and the borrower has engaged in multiple acts of rent skimming, a court must award exemplary damages of at least three times the actual damages (Cal. Civ. Code § 891(a)). The right to bring a claim based on rent skimming is not limited by either the one-action rule or anti-deficiency laws (Cal. Civ. Code § 891(g)).

2. Before the Foreclosure

Q 3.  Prior to foreclosure, what are the owner’s obligations to the lender?

A  Prior to title transferring at a foreclosure sale, the borrower has a contractual obligation to make the payments specified in the note. Aside from the potential criminal and civil issue of rent skimming, the borrower has no obligation to use the specific rents received to pay off the loan. If the lender wishes to gain access to the property as a mortgagee-in-possession the borrower can deny the lender permission. (Cal. Civ. Code § 2927.)  Similarly, if the lender attempts to peacefully exercise a rents and profits clause without bringing a judicial action, the borrower can prevent this voluntary exercise by refusing permission and instructing any tenants to continue making payments as called for in the lease and not to the requesting lender.

Q 4.  How can the owner defeat an action brought by the lender to appoint a receiver?

A  If the lender brings a legal action to appoint a receiver to enforce a rents and profits clause, the borrower can oppose the action. The appointment of a receiver is discretionary, not automatic (Cal. Civ. Proc. Code § 564(b)(8).) Where a rents and profits clause does not exist and the lender applies to the court for appointment of a receiver, the borrower may defeat the action if the borrower can show the following:

(1)  The property is in no danger of being lost, removed, or materially injured; or
(2)  That even if a condition has not been performed, the property is sufficient to satisfy the debt (Cal. Civ. Proc. Code § 564(b)(2).)

a. Mortgagee-in-Possession

Q 5.  Prior to the foreclosure sale, what are the lender’s rights?

A  A lender who wishes to enter the property for the purposes of collecting rents may do so with the express consent of the owner/borrower in default even without additional consideration or a formal agreement (Cal. Civ. Code § 2927; Hooper v. Young (1903) 140 Cal. 274). A lender who does so is a mortgagee-in-possession. However, a lender who enters the property without the consent, or over the objection, of the owner/borrower in default becomes liable to the owner for forcible entry and trespass. (California Hotel Co. v. Bank of America Nat'l Trust & Sav. Ass'n (1939) 31 Cal. App. 2d 295; Mcguire v. Lynch (1899) 126 Cal. 576).

Q 6.  How does the lender become responsible to the tenant upon becoming a mortgagee-in-possession?

A  A lender who becomes a mortgagee-in-possession enjoys the advantage of directly collecting rent and applying it toward the unpaid debt.  However, the lender is responsible to the borrower and junior lien holder for losses caused by negligence or failure to act in a business-like manner. (Johns v. Moore (1959) 168 Cal. App. 2d 709. )

For lenders who find the advantages outweigh the disadvantages, although not required, a written agreement is advisable in order to avoid conflicts over whether consent was granted or withheld, as well as to have documentation which will support the lender's claim to rents if questioned by tenants.

b. Rents and Profits Clauses

Q 7.  How is the lender legally able to invoke the status as mortgagee-in-possession (i.e., how does the foreclosing lender pursue the direct collection of rent)?

A  Today, most deeds of trust contain a rents and profits clause. This can be an absolute assignment of rents, an absolute assignment of rents conditioned on default, or an assignment of rents as additional security. This last type of clause is typically found in short form deeds of trust recorded in each county and referred to by a short form trust deed.

An example of such a clause appears below:

As additional security, Trustor hereby gives to and confers upon Beneficiary the right, power, and authority, during the continuance of these Trusts, to collect the rents, issues, and profits of said property, reserving unto Trustor the right, prior to any default by Trustor in payment of any indebtedness secured hereby or in performance of any agreement hereunder, to collect and retain such rents, issues, and profits as they become due and payable. Upon any such default, Beneficiary may at any time without notice, either in person, by agent, or by a receiver to be appointed by a court, and without regard to the adequacy of any security for the indebtedness hereby secured, enter upon and take possession of said property or any part thereof, in his own name sue for or otherwise collect such rents, issues, and profits, including those past due and unpaid, and apply the same, less costs and expenses of operation and collection, including reasonable attorneys' fees, upon any indebtedness secured hereby, and in such order as Beneficiary may determine. The entering upon and taking possession of said property, the collection of such rents, issues, and profits, and the application thereof as aforesaid, shall not cure or waive any default or notice of default hereunder or invalidate any act done pursuant to such notice.

Q 8.  Does the existence of a rents and profits clause mean the lender can invoke the mortgagee-in-possession status without doing anything else?

A  It depends.  The collection of rent pursuant to a rents and profits clause does not, in and of itself, impose mortgagee-in-possession status on the lender. (Strutt v. Ontario Sav. & Loan Ass'n (1972) 28 Cal. App. 3d 866.) The lender must take steps before proceeding to collect. However, a demand upon the tenant or borrower to turn over the rents, coupled with their cooperation is all that is needed (Lee. v. Ski Run Apartments Assoc., (1967) 249 Cal. App. 2d 293).

If neither party cooperates or if the borrower objects (even if the tenant agrees) the lender needs to file a judicial action for appointment of a receiver.

The legal action is one for specific performance of the borrower's promise as contained in the trust deed. The request for a receiver is secondary to this specific performance action (Cal. Civ. Proc. Code § 564 (b)(8)). A receiver is an agent of the court, not the lender, and must maintain control of the rents until ordered to pay them out. The order for appointment of the receiver can direct the receiver to apply collected rents:

(1)  First to pay the expenses of the receivership (administrative and management);
(2)  Then to payment of taxes and senior secured debts; and
(3)  Followed by the maintenance of a working capital account before any funds collected are to be made available to the lender. (See, California Mortgage and Deed of Trust Practice, 2nd ed., Roger Bernhardt (hereinafter referred to as "Bernhardt") pp. 259-260.)

Monies collected by a receiver pursuant to an additional security rents and profits clause can be received by a lender following a trustee's sale without violating either the one-action or anti- deficiency rules (Bernhardt, supra Section 5.22).  In the absence of a rents and profits clause it may still be possible to have a receiver appointed, but the burden is much greater on the applying lender than where a rents and profits clause exists (Cal. Civ. Proc. Code § 564(b)(2)).

3. After The Foreclosure Sale

Q 9.  If the borrower is an occupant of the property, and the lender forecloses judicially (not trustee’s sale), can the lender evict the borrower?

A  If the borrower occupies one of the units in the rental property and the lender has foreclosed judicially, then the borrower is entitled to possession throughout the statutory redemption period (either three months or one year depending on the amount received at the judicial foreclosure) (Cal. Civ. Proc. Code §  729.030). The foreclosing lender can charge the borrower rent for this occupancy equal to the value of use and occupation (Cal. Civ. Proc. Code §  729.090(a)).

However, if the occupant/borrower fails to pay rent, the lender probably lacks the ability to evict during the redemption period. After the redemption period, the lender should be able to pursue an action for collection of unpaid rents. (Cal. Civ. Proc. Code §  729.090(a).)

Q 10.  If the borrower is the occupant of the property, and the lender forecloses through a trustee’s sale, can the lender evict the borrower?

A  Yes.  If the lender has foreclosed by way of a trustee's sale, the borrower can be evicted immediately following a three-day Notice to Quit. (Cal. Civ. Proc. Code § 1161a(b).)

B. Lender Issues with the Tenants

1. Before The Foreclosure

Q 11.  Prior to the foreclosure sale, is the tenant required to turn rent directly over to the foreclosing lender?

A  No.  A lender may request that a tenant make payments directly to the lender rather than the borrower in an attempt to create a voluntary exercise of a rents and profits clause or to establish the lender as a mortgagee in possession. The tenant may comply but is not required to do so.

If the lender goes to court and has a receiver appointed with the power to collect rents, a tenant will be obligated to pay the receiver. There is no apparent right in California law permitting a lender, or receiver, to evict a tenant for a breach of a lease. Indeed, there is a danger in doing so if, in fact, the borrower reinstates the loan prior to a foreclosure sale and is damaged by the loss of a tenant.

2. After The Foreclosure

Q 12.  Following a foreclosure sale, what are the tenant’s obligations to the lender?

A  Following a judicial foreclosure sale, the tenant, after receiving notice of the sale, must pay rent to the lender or the appointed receiver from the time of the sale until a redemption by the former owner (Cal. Civ. Proc. Code § 729.090(a), Cal. Civ. Code § 1111).

Following a trustee’s sale foreclosure, the tenant must also pay rent to the lender (or a receiver if one had been appointed) from the time of the sale (Farris v. Pacific States Auxiliary Corp. (1935) 4 Cal. 2d 103, 105).  There is no period of redemption after a trustee’s sale; however, some refer to the right to “cure the default” any time prior to five business days before the date of the trustee’s sale as a “right of redemption” (see Tomczak v. Ortega (1966) 240 Cal. App. 2d 902).

a. When the Lease is Senior to the Lender’s Deed of Trust

Q 13.  If the lease is senior to the deed of trust of the foreclosing lender, what are the tenant’s rights after the foreclosure?

A  When the lease is senior to the deed of trust (i.e., the deed of trust was recorded after the date of the lease) or the lender had knowledge of the tenancy at the time the loan was made, the lender takes the property subject to the rights of the tenant (Cal. Civ. Code §§ 1214, 1215, Dover Mobile Estates v. Fiber Form Products, Inc. (1990) 220 Cal. App. 3d 1494, 1498.) The tenant becomes obligated to the lender as if the lender were the former owner (Cal. Civ. Code §§ 821, 1111).

b. When the Lease is Junior to the Lender’s Deed of Trust or Tenant is on a Periodic Tenancy

Q 14.  If the deed of trust of the foreclosing lender is senior to the lease, (i.e., the deed of trust was recorded prior to the date of the lease) or the tenant doesn’t have a lease, what are the tenant’s rights after a foreclosure?

A  The foreclosing lender or the immediate successor-in-interest at foreclosure (e.g., the purchaser at the trustee’s sale) who wishes to terminate the tenancy must give the tenant the following notice to terminate the tenancy:

3 days:  If the tenant is the mortgagor (borrower), then s/he must receive a 3-day Notice to Quit prior to termination of the tenancy.  Also, if the tenant is a party to the mortgage note, then s/he must receive a 3-day Notice to Quit to terminate the tenancy.  (Cal. Civ. Proc. Code §§ 1161a, 1161b, P.L. 111-22.)

60 days:  If the tenant is the child, parent or spouse of the mortgagor (borrower), then s/he must receive a 60-day Notice to Quit prior to eviction.  If the tenancy is not the result of an arms-length transaction or the rent is substantially lower than fair market rent, then s/he must receive a 60-day Notice to Quit to terminate the tenancy.  (Cal. Civ. Proc. Code § 1161b, P.L. 111-22.)

90 days:  If the tenant is not the mortgagor (borrower) or is not a child/parent/spouse of the borrower or the tenant is on a periodic tenancy and the tenancy is the result of an arms-length transaction and the rent is not substantially lower than fair market rent, then the tenant is entitled to a 90-day notice to terminate the tenancy. (P.L. 111-22.)

Full term of the lease:  If the tenant is not the mortgagor (borrower), or is not a child/parent/spouse of the borrower, and the tenancy is the result of an arms-length transaction and the rent is not substantially lower than fair market rent and the tenant has a lease, then the tenant is allowed to occupy the property until the end of the lease term.  However, if the foreclosed property is sold to a buyer who will occupy the property, then the lease can be terminated with a 90-day notice.  (P.L. 111-22.)

Q 15.  Why is there no 30-day notice option in Question 14?

A  A 30-day Notice to Terminate a Tenancy can be used when the property is not a foreclosure property and the tenant has resided in the property for less than one year (60-day notice if the tenant has resided in the property for one year or longer) (Cal. Civ. Code § 1946.1).

Q 16.  Do the notice periods in Question 14 still apply if the tenant is not paying any rent at all?

A  It depends.  If the lender foreclosed by judicial foreclosure and the tenant is the mortgagor (borrower), the lender probably lacks the ability to evict during the redemption period. After the redemption period, the lender should be able to pursue an action for collection of unpaid rents. (Cal. Civ. Proc. Code § 729.090(a); Bernhardt, Section 5.37.)  For other tenants who aren’t paying any rent, after the judicial foreclosure the lender may give a 3-day Notice to Quit (Cal. Civ. Proc. Code § 1161(2)).

If the lender has foreclosed by trustee’s sale (and, thus, there is no period of redemption), the lender may evict a non-paying tenant or mortgagor (borrower) by giving a 3-day Notice to Quit (Cal. Civ. Proc. Code § 1161(2)).

Q 17.  If the deed of trust of the foreclosing lender is senior to the lease, (i.e., the deed of trust was recorded prior to the date of the lease), can the lender enforce the lease if the tenant wants to terminate it?

A  No.  When the deed of trust of the foreclosing lender is senior to the lease, the lender who finds that the lease is favorable and wishes to continue to enforce it may be disappointed to discover that the tenant has the right to terminate the lease after foreclosure. (Dover Mobile Estates v. Fiber Form Products, Inc. (1990) 220 Cal. App. 3d 1494.)

c.  Security Deposit Issues

Q 18.  After foreclosure, what party is responsible for returning the tenant’s security deposit?

A  Upon termination of the borrower's interest in the property, security deposits which are not returned to a tenant should be transferred to the borrower's successor-in-interest, the lender (Cal. Civ. Code §§ 1950.5 (g), 1950.7(d)).  In the event the owner fails to comply with this requirement, and the rental is residential, the owner remains jointly responsible with the lender for repayment of security to the tenant.(Cal. Civ. Code § 1950.5(i)).

Q 19.  After foreclosure, to whom does the tenant go to get the security deposit back?

A  An owner who is about to lose property through foreclosure is unlikely to either:

(1)  Transfer any security deposits to the foreclosing lender; or
(2)  Return the security deposits to the tenants as is required by law.

(Civil Code Sections 1950.5(g), 1950.7(d).)

In the event the owner who has lost the property through foreclosure has not done either option above, and the rental is residential property, the foreclosing lender is jointly and severally liable, along with the former owner, for repayment of any security to which the residential tenant is entitled (Cal. Civ. Code § 1950.5((i)).

Possibly this express statement of joint and several liability can be used by the lender to bring a legal action against the borrower for recovery of any sums properly paid to residential tenants for security deposit claims by the lender without violating the one action or anti-deficiency rules. (See California Real Estate, Miller & Starr § 19:143 (online).)

Q 20.  Upon foreclosure, must the lender return the tenant’s security deposit?

A  Regardless of the form of foreclosure used, a residential lender becomes obligated to return unused security deposits to any residential tenants unless the borrower returned these sums to the tenants prior to the transfer of title. (Cal. Civ. Code §§ 1950.5, (i) and (j).)

Commercial lenders who acquire the property through foreclosure do not have the same statutory obligation to return deposits to tenants if the lender does not receive the security deposit money from the former owner (Cal. Civ. Code § 1950.7).

III. Owner Issues with the Tenant

A. Before the Foreclosure

Q 21.  After the owner’s default but prior to foreclosure, what are the tenant’s obligations to the owner?

A  The borrower is contractually entitled to receive rent from the tenant even though in default on the note. A default on the note, in and of itself, does not create a breach of the covenant of quiet enjoyment of the leased premises or a denial of possession to the tenant. Thus, the tenant who ceases payment of rent can be evicted by the owner or sued for breach of the lease. (Cal. Civ. Proc. Code § 1161.)

B. After the Foreclosure

Q 22.  Following foreclosure, what are the owner’s/borrower’s obligations regarding the tenant’s security deposit?

A  After the foreclosure sale, the owner must return the security deposit to the tenant or transfer it to the foreclosing lender in order to be relieved of liability for the security deposit to the tenant (Cal. Civ. Code §§ 1950.5 (h), 1950.7 (d)). The owner/borrower who in bad faith fails to return a security deposit to a tenant can be held liable to the residential tenant for up to twice the amount of the security, in addition to actual damages (Cal. Civ. Code § 1950.5 (l)).  For a commercial tenancy, the owner/borrower can be held liable to the tenant for bad faith retention of the deposit in statutory damages not to exceed two hundred dollars, in addition to any actual damages (Cal. Civ. Code § 1950.7 (f)).

V. Property Management Issues

Q 23.  Does the owner’s default entitle the property manager to neglect or deviate from the property management agreement?

A  No, the default of the owner does not entitle the manager to neglect responsibilities identified in the property management agreement. Prior to a foreclosure sale, the property manager has contractual and fiduciary obligations to the owner of the property. If the management agreement provides for the collection of rent, then such activity, consistent with the terms of employment, is done on behalf of the owner. Honoring a request of the lender for disbursements of rents received, without the express permission of the owner would be grounds for breach of the manager's contractual and, possibly, fiduciary duties.

Q 24.  How does a court-appointed receiver affect the property manager’s rights and obligations to the owner?

A  Once a receiver has been appointed by a court, if the power of appointment directs the manager to hand over received rents, then the request of the court-appointed representative should be satisfied. The property manager should request a copy of any court order.  If the receiver collects rents directly, and takes over other management functions from the property manager, this would have the effect of terminating the agency and contractual obligations of the manager and establishes probable grounds for a manager's breach of contract claim against the owner. Monies held by the manager should be disbursed in accordance with the instructions of the owner unless directed otherwise by a receiver who has been granted that authority.

Q 25.  Can the property manager make a breach of contract claim against the owner following the foreclosure sale?

A  After the foreclosure sale, the subject of the agency--the owner's interest in the real property-- becomes “extinct,” thus terminating the agency (Cal. Civ. Code § 2355(b)). As a consequence, the owner may be liable to the property manager for breach of contract damages. However, disbursement of previously-collected sums still requires direction from the former owner or court.

Q 26.  Does the property manager have any obligation to comply with requests from the foreclosing lender?

A  The property manager is the agent of the owner and has no obligation to honor any request for disbursement of rents made by a foreclosing lender. Upon receiving such a request, that agent's duty of full disclosure would impose upon the manager a requirement to inform the owner of the lender's request. If a lender has a receiver appointed, the manager can presumably enter into an agreement with the receiver to continue performing property management functions, for a fee. Such an agreement would affect rents collected and services performed after the date of the agreement.

Q 27.  Following the foreclosure sale, may the property manager enter into a new property management agreement with the lender?

A  Yes.  After the foreclosure sale terminates the owner's interest in the property and the agency relationship between the owner and manager, the manager may enter into a new property management agreement with the lender, just as the manager could with any owner of property.

Q 28.  Does the property manager have the right to release tenants’ security deposits to the lender?

A  No.  Should the lender demand that the manager release previously-held tenants' security deposits, the manager should refuse. These funds are held in a trust account for the benefit of the former owner and are not the property of the manager (Cal. Bus. & Prof. Code §§10145, 10176(e)).

Q 29.  Should the property manager inform tenants that the owner is in default and facing foreclosure?

A  One issue facing a property manager is whether to inform tenants that the property owner is in default and facing foreclosure.  What should the manager do? If during the lease negotiations the manager acted as a dual agent, then the manager's fiduciary responsibilities would require disclosure of the foreclosure. If there is no agency relationship with the tenant, then the manager needs the owner’s permission to disclose the fact of the foreclosure to the tenants.

Q 30.  Following foreclosure, can the tenant establish a claim against the property manager in order to secure the return of their security deposits?

A  Once the foreclosure sale has been completed, tenants whose leases have terminated and who desire a return of their security deposits might try to sue the manager.  Typically, the property manager is not the owner of the property and is acting solely in an agency capacity.  Thus, there shouldn’t be any personal liability.  However, that may not discourage the tenant from suing the property manager.

VI. Conclusion

Unfortunately, many areas of the state are experiencing record levels of foreclosures. REALTORS® in these areas, as well as anywhere else where a foreclosure is occurring, are often asked questions by the principals involved with the property. Owners, lenders and tenants of rental property in foreclosure who are, have been or anticipate having a working relationship with a REALTOR® may seek advice from the real estate licensee. While a licensee should avoid giving legal advice, it is helpful for a REALTOR® to have an understanding of some basic issues facing these principals. Such an understanding can help guide the REALTOR® away from problems and toward solutions.

When a rental property is being foreclosed upon, the duties and relationships between and among the principals and agents change depending on the strategies employed by the foreclosing lender, the needs and desires of the property owner, and the type and priority of the tenants' leases. Another critical factor affecting the relationships is whether or not the default has resulted in an actual sale of the property. This article has identified many of the issues most likely to be faced by a real estate licensee. The purpose is to enable a REALTOR® to identify issues and problems so that appropriate steps can be taken, or appropriate referrals made, to enable the principals and REALTORS® alike to make their way through a difficult situation with as much information and ease as possible.

Housing Prices Down 42.4% Since Peak of January 2006 in Northern CA – Wine Country

Report just released by the California Association of Realtors shows the Northern Wine Country in California had a peak price of $645,080 in January 2006.  As of December 2009 the median price of a home in the wine country was $371,430 for a change of –42.4%!
-Burt

Complete CAR article can be read here.

News Hub: Has Commercial Real Estate Bottomed?

-The Wall Street Journal

Renter’s Market

by Katie Kuehner-Hebert 

The weak economy has hammered many of the mom-and-pop stores that rent commercial space from Robert Phillips, whose company owns and manages property in San Diego. In some cases he has helped them through tough times by offering them as much as four free months of rent.

“The retail sector especially is really struggling, so everybody’s looking for help,” says Phillips, president and chief executive officer of Pacific Coast Commercial Asset Management.

The worst recession in decades has caused apartment landlords and other commercial property owners across the country to contend with falling rental rates and rising vacancies. They are under pressure as jobless renters buddy up and commercial tenants struggle to keep afloat. Business bankruptcies soared in the United States in 2009, and they were on track to double compared to 2008.

Owners are watching the values of their properties tank, in some cases to far below the amount they still owe. Smaller and medium-size property owners are especially vulnerable, but the big and powerful aren't immune either. In New York, developer Tishman Speyer defaulted on debt from its $5.4 billion buyout of Peter Cooper Village and Stuyvesant Town, which was the largest single-property transaction in history. The developer has lost an estimated $3 billion on the deal.

The pressure on property owners is taking a heavy toll. About 2.8 million properties were foreclosed in 2009, up 21 percent from 2008 and 120 percent from 2009, according to RealtyTrac, on online marketplace for foreclosed properties.

“This is not a good time to be an owner of a commercial property—not only has the price of the building likely gone down causing the possibility of an underwater mortgage, but tenants have been able to extract some pretty serious concessions, including free rent in some cases,” says Christopher Cornell, an economist at Moody’s Economy.com, a division of Moody's.

Moody's says its REAL Commercial Property Price Index declined by 44 percent from its peak in October 2007 to the latest reading, which was in October. That means that many owners of commercial properties of all types—office, retail, industrial, warehouse, and apartments—likely now have negative equity in their properties, Cornell said.

The problem is compounded by higher vacancies caused by business tenants going under or apartment renters sharing units to make ends meet, which has resulted in lower rental rates, said Andres Carbacho-Burgos, another economist at Moody’s Economy.com.

Apartments rates fell 4.1 percent on a national basis, and rates dropped much more in some markets, according to George Ratiu, an economist with the National Association of Realtors. For example, rates in and around New York fell as much as 15 percent in some neighborhoods, after the region was hard-hit by massive job losses on Wall Street, which reverberated through the local economy. (For a graphic showing recent vacancy rates in key U.S. cities for office, industrial, retail, and multifamily units, click here).

In San Diego, for example, rents fell by an average of 3 percent, but some parts of the region were hit much harder, says Chris Garland, an account manager with ENG Properties, which owns about a dozen apartment complexes in the area. In neighborhoods that are saturated with apartments, such as the North Park neighborhood, higher vacancies have caused rental rates to fall by as much as 10 percent over the past year.

To attract tenants for its properties, ENG Properties has had to make a number of concessions beyond lower rents. It has reduced security deposits, upgraded appliances, and replaced carpets earlier than the company had planned, Garland says. The company says its efforts have helped minimize vacancy rates at its properties. “We’re not thriving, but we’re doing better than just surviving."

Those owners of just one or two properties with few units are likely suffering the most, says Linda Morris, president of Cambridge Management Group, Inc. in Escondido near San Diego. Morris owns a duplex in San Diego and manages apartments for other landlords.

“Owners of smaller properties have very low margins, and some are having to contribute their own money to pay the mortgages because rents are reduced while operating costs for things like insurance, water, utilities, and trash keep going up,” Morris says.

Owners of larger apartment complexes likely have the cushion of better margins, she says, but then again, many of those properties were bought right before home values plummeted and now their owners are saddled with underwater mortgages.

Garland says ENG Properties has been able to escape that dilemma because it purchased its properties years before the housing crisis. In fact, its properties are now valued higher than before because of all the upgrades the company made last year. ENG Properties says it will likely reap an even better return when it eventually sells those properties.

Phillips, of Pacific Coast Commercial, owns several units within a commercial strip mall in San Diego and manages commercial properties for other property owners. Some of his business tenants asked for discounted rents over the past year, but after reviewing their financial statements, Phillips declined. “I think they were just probing to see what they could get, but they are all doing okay,” he says.

Phillips has heavily discounted rents for tenants of properties he manages for other owners and, in some cases, has given four months of free rent. In each case, the landlords approved the discounts.

In some areas of San Diego, such as El Cajon, rent on industrial space fell from $1.10 to 65 cents per square foot in the span of one year, and many tenants have been looking for a way out of their leases. In cases where tenants are nearing the end of their multiyear agreements, Phillips has been offering lower rental rates as an inducement to renew.

A veteran of several downturns over the past 30-odd years, Phillips says that he believes that property owners have really “matured,” and that most have quickly responded to the current crisis.

“It’s really a partnership between the owners and tenants,” he says. “If the owners are honest with themselves and the tenants are honest with themselves, then they can work together and they can both make it through the cycle.”

California Apartment Association News

 

Rent  Control Legislation Stopped by CAA in State Assembly

The California Apartment Association (CAA) and the California Association of Realtors (CAR) successfully stopped legislation last week that would have, in effect, forced landlords to remain landlords for one full year even if they wanted to simply get out of the rental housing business and use their own private property for other uses.

Existing law specifies that in rent controlled cities if a rental property owner wants to get out of the rental housing business, he or she is required to give all tenants a 120 day notice of the intent to withdraw the building/units from the market. If there are any residents who are over 62 years of age or disabled, those residents are offered a one year notice.

Assembly Bill 1171, authored by San Francisco Assemblyman Tom Ammiano, would have required that if a landlord wanted to get out of the rental housing business, and even just one resident was 62 years of age or disabled, every other tenant in the building would have to be offered the one year notice.

"The elderly and disabled should merit special considerations when it comes to housing," said Debra Carlton, CAA's Senior Vice President of Public Affairs. "But imagine the economic impact on the property owner who must maintain the building for one full year.  The owner would be severely hampered in the sale of the property as few if any buyers will want to take on that provision."

CAA believes that current statutes adequately protect special needs residents of rental housing and that any laws dealing with rent controls should be left to local jurisdictions. The bill was pulled by the author from committee consideration after opposition from CAA lobbyists and CAA members from throughout California.

Oral Arguments in Case to Keep Section 8 Voucher Program Voluntary to Take Place this Month

The Second District Court of Appeal will hear the case of Sabi v. Donald Sterling and Donald T. Sterling Corp. this month in Los Angeles.   The issue in this case is whether landlords may refuse to accept Section 8 vouchers for federal housing assistance payments from disabled, low-income tenants and, specifically, whether such a practice can constitute illegal discrimination.  The trial court had ruled in favor of the landlord, holding that the owner is not required to accept the tenant's section 8 voucher. The issues on appeal are (1) whether an owner is required to participate in the Section 8 program because of the state's prohibition against "source of income" discrimination, and (2) whether an owner may be required to take Section 8 as a reasonable accommodation for a resident/applicant's disability?  CAA filed an Amicus Brief in this case on behalf of the property owner in mid-June 2009.  An overview of the oral argument will appear in the next CAA News.

For more information on participation in the Section 8 Voucher program, see CAA Policy Statement 17: Federal Section 8 Housing Choice Voucher Program.

New California Law Mandates Water Efficient Plumbing Fixtures

As California enters another year of drought, the Legislature has proactively initiated water conservation measures for residential housing. Click below to read a new CAA Issues Insights on a new California law.

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Legal Q & A

Q: I rent out a house to a group of students.  They are all on one lease.  Recently they have been complaining to me about how noisy one of their fellow tenants is.  Somebody told me I could bring an action for quiet enjoyment to force that tenant to be quieter. Is that the best approach?

A: The "covenant of quiet enjoyment" is implied in every residential lease.  This covenant provides that the landlord will not interfere with the resident's quiet enjoyment of the premises and means the landlord will not disturb the tenant's enjoyment of the tenant's home.  Many rental agreements, such as CAA's forms 2.0 and 2.1, also require the tenant to not violate the quiet enjoyment of other residents, which would include that tenant's roommates and residents of other units. If you have such a provision, the recourse would be a three-day notice to comply with that provision of your rental agreement (followed by an unlawful detainer action, if the tenant does not comply).

Note however that you can only file an eviction action against ALL the tenants, not just the annoying one.  The unlawful detainer action is designed to get possession of the property back.  As a result, if one tenant is annoying his roommates, and they can't work it out, your recourse is to serve a three-day notice and evict ALL of them.  Explaining that to them may encourage them to seek their own resolution. 

One way to try to head off this type of problem would be to use an addendum that sets your house rules - CAA's form 17.0 (Resident Policies and House Rules Addendum) allows you to set things such as quiet hours.  Making these rules clear to all applicants will discourage those who want to watch loud action movies in the middle of the night from living on your property.  You may also want to encourage the roommates to enter into their own agreement which could cover other behavioral issues such as housekeeping and legal issues such as disposition of the security deposit should some roommates move out while others move in.

See also  CAA's Issue Insight "Co-Tenants and Roommates: Practical Considerations for Rental Property Owners".

Pending Home Sales Down from Surge but Higher than a Year Ago

Contract activity for pending home sales fell after a surge of activity in preceding months to beat the original deadline for the first-time home buyer tax credit but remains comfortably above a year ago, according to the latest survey. The Pending Home Sales Index, fell 16.0 percent to 96.0 from an upwardly revised 114.3 in October, but is 15.5 percent higher than November 2008 when it was 83.1. Lawrence Yun, NAR chief economist, said a drop was expected. “It will be at least early spring before we see notable gains in sales activity as home buyers respond to the recently extended and expanded tax credit,” he said. “The fact that pending home sales are comfortably above year-ago levels shows the market has gained sufficient momentum on its own. We expect another surge in the spring as more home buyers take advantage of affordable housing conditions before the tax credit expires.

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What is a memorandum of lease?

A memorandum of lease—also known as a short-form lease—is a brief summary of the lease’s basic terms. During lease negotiations, a tenant may demand that the property owner agree to sign and record a memorandum of lease with local property records. Once recorded, the memorandum of lease becomes a public record that announces to third parties the existence of the tenant’s lease and its rights under the lease. Then, for example, if a bank files a lien against a center where the tenant’s space is located, in most jurisdictions, the tenant’s lease will have priority over that lien.

 

-Burt

The 2010 Handbook

Below are 40 ways to live your life in 2010 (and after) I received from Bob Fioretti of Infinite Possibilities, LLC.  I thought is was worth sharing with you.

Peace and joy,

-Burt

 

Health:

1. Drink plenty of water.
2. Eat breakfast like a prince, lunch like a king and dinner like a beggar.
3. Eat more foods that grow on trees and plants and eat less food that is manufactured in plants.
4. Live with the 3 E's -- Energy, Enthusiasm and Empathy.
5. Make time to pray.
6. Play more games.
7. Read more books than you did in 2009.
8. Sit in silence for at least 10 minutes each day.
9. Sleep for 7 hours.
10. Take a 10-30 minutes walk daily. And while you walk, smile.

Personality:

11. Avoid comparing your life to others. You have no idea what their journey is all about.
12. Avoid having negative thoughts or things you cannot control. Instead invest your energy in the positive present moment.
13. Avoid over doing. Stretch your boundaries but keep healthy limits.
14. Avoid taking yourself so seriously. Life is meant to be joyous and fun.
15. Avoid wasting your precious energy on gossip. Speak the truth with people directly.
16. Dream more while you are awake.
17. Envy is a waste of time. You already have all you need.
18. Forget issues of the past. Avoid reminding your partner with His/her mistakes of the past. Deal with the present and focus on what you can do to create exactly what you want in your relationships.
19. Life is too short to waste time hating anyone. Love is the greater force and energy.
20. Make peace with your past so it won't spoil the present.
21. No one is in charge of your happiness except you. Be 100% accountable for the life you desire.
22. Realize that life is a school and you are here to learn. Problems are simply part of the curriculum that appear and fade away like algebra class but the lessons you learn will last a lifetime.
23. Smile and laugh more.
24. You don't have to win every argument. Agree to disagree...

Society:

25. Call your family often.
26. Each day give something good to others.
27. Forgive everyone for everything.
28. Spend time w/ people over the age of 70 & under the age of 6.
29. Make at least three people smile each day.
30. What other people think of you is none of your business.
31. Your job won't take care of you when you are sick. Your friends will. Stay in touch.

Life:

32. Do the right thing!
33. Get rid of anything that isn't useful, beautiful or joyful.
34. GOD heals everything.
35. However good or bad a situation is, it will change.
36. No matter how you feel, get up, dress up and show up.
37. The best is yet to come..
38. When you awake alive in the morning, thank GOD for it.
39. Your Inner most is always happy. So, be happy.

Last but not the least:

40. Have a happy, healthy, bless and prosperous New Year in 2010. How you begin the year will set the tone and pace the days to come. Wishing you a New Year filled with magic, miracles and an abundance of everything your heart desires.