Unemployment Taking Toll On Landlords

The rise in unemployment has prompted and/or forced tenants to seek subleases, roommates, cheaper units, and better lease terms. Landlords have been forced to accomodate the new demanding tenant.

In the third quarter of 2009, the national apartment vacancy rate was 7.8%, a 23-year high, according to Reis Inc., who tracks vacancies and rents in the top 79 markets. This shifts the power of negotiation to the tenant.

Landlords are having to take extra measures to keep their units leased. Landlords are attracting and retaining tenants by offering incentives and rent cuts. Landlords would rather lower rent rates to keep existing tenants because revenue would decrease even more if tenants were lost. Empty units are sitting on the market for a long a time, and landlords want to avoid the extra costs and lost revenue associated with empty units.

Landlords are also loosening tenant qualification standards. For example, a foreclosure history often barred tenant qualification. However, a foreclosure history is becoming so common, that landlords are being forced to overlook that on credit records. Any renter is better than no renter.

The relative freeze on construction along with the economic recovery and/or inflation should eventually help landlords regain their footing. Until then, it's a tenant market.

Entrepreneurs Defeat the IRS; Save Taxes

For as long as LLCs and LLPs have existed, a business owner's salary could not be offset by business losses. For example, let's say you own a barber shop and a billiard hall. Together your two businesses lost $75,000, and you earned $100,000 in combined salary working as a barber and as a billiard hall manager. According to the IRS, you have $100,000 in taxable income. That doesn't make sense to me. That also didn't make sense to the recent tax court. Under the recent decision, so long as the owner actively participates in the businesses, the business losses would rightfully offset personal income, and you would only have $25,000 in taxable income. That is a victory for entrepreneurs. However, I am also worried that this may prove in the future to be a double-edged sword. This decision may invite greater assessments of self-employment tax on LLP and LLC income. In the past, owners/investors have claimed large exemptions from taxes on this income by asserting limited partner status. We entrepreneurs may not be able to have our cake and eat it too. The IRS will argue that either the income is exempt, or the losses are deductions.

Mall Tenants Demand Rent Cuts

A few months ago I wrote a short article regarding the ability of commericial tenants to negotiate rate reductions in a recession. In such a down economy, landlords are more willing to renegotiate rent rate reductions to keep their tenants. Tenants benefit from a lower lease rate. Landlords benefit from not losing tenants. Recently the Wall Street Journal published an article explaining that many tenants in malls are obtaining rent rate reductions. Often these rate reductions are based on key lease terms, relatively common in mall and shopping center leases, allowing tenants to demand rent rate cuts or rescission if key tenants or a specified percentage of tenants leave the mall or shopping center. This is just one of the several potential grounds a tenant may use to for a rental rate reduction request.

Appellate Court Reaffirms Landowners' Protection from Lawsuits by Uninvited Guests

On May 22, 2009, the 1st District reaffirmed the enforceability of Civil Code Section 846 (Audrey Manuel v. PG&E). In Manuel v. PG&E, Fourteen-year-old Erika Manuel climbed a transmission tower owned by Pacific Gas & Electric Company. Tragically, she came in contact with a live transformer and was electrocuted, suffering serious injuries. She died eleven days later. Erika’s parents sued PG&E, which ultimately obtained summary judgment based on the immunity provided by Civil Code section 846. Civil Code section 846, often referred to as the recreational use immunity statute, creates an exception to the general rule that a private landowner owes a duty of reasonable care to persons coming upon land. (Bacon, supra, 53 Cal.App.4th at p. 859.) The effect of section 846 was summarized by the Supreme Court in Ornelas v. Randolph (1993) 4 Cal.4th 1095, 1099-1100: “[A]n owner of . . . real property owes no duty of care to keep the premises safe for entry or use by others for recreational purposes or to give recreational users warning of hazards on the property, unless (1) the landowner willfully or maliciously fails to guard or warn against a dangerous condition, use, structure or activity; (2) permission to enter for a recreational purpose is granted for a consideration; or (3) the landowner expressly invites rather than merely permits the user to come upon the premises. The landowner’s duty to the nonpaying, uninvited recreational user is, in essence, that owed a trespasser under the common law as it existed prior to Rowland v. Christian [(1968) 68 Cal.2d 108] . . . i.e., absent willful or malicious misconduct the landowner is immune from liability for ordinary negligence.”

Inflation May Help Recover Lost Property Value

Warren Buffett, while praising President Obama on CNBC for his efforts to stimulate the economy said, "The current course could trigger higher inflation when demand rebounds. We are certainly doing things that could lead to increased inflation. In economics there is no free lunch." As the dollar value decreases, so will debt. Some people in debt think that inflation is just what the doctor ordered. Those with assets will want to curb inflation. People need to know how inflation will affect their particular business deals and other investments, and plan accordingly.

Business Owners Renegotiate Leases

Home owners are getting loan modifications as a way to mitigate losses for both the borrower and the bank. Similarly, business owners may be able to obtain a lease modification as a way to mitigate losses for both the landlord and the tenant. Commercial vacancy rates are increasing, and landlords are increasingly willing to modify lease terms instead of pursuing eviction. Landlords understand that some rent is better than no rent. Small businesses, like individuals, need to talk to their creditors if they are facing financial difficulties. A lease is often one of the larger expenses for a business, and thus a landlord is one of its primary creditors. Business tenants facing financial difficulties should contact their attorney to explore lease modification negotiation.

Small Businesses Struggle to Survive; but some Entrepreneurs see an Opportunity

In a recession, small businesses are usually among the first victims. Banks and consumer credit cards know this, and continue to tighten credit lines and close accounts. Small businesses, who in tough times often use credit cards and lines of credit to pay employees or buy inventory, are now left with no option but to decrease expenses and lay off employees. Entrepreneurs seeking to start a new small business face similar hurdles in a recession. However, opportunities still exist for new business start-ups backed by adequate capital and/or owner-supplied financing. The costs of start-up are decreasing. For example, landlords are offering better lease terms in light of the rising vacancy rates, and build-out quotes are becoming increasingly competitive.

Home Buyers Learning To Hire Lawyers

In many states, it is regular course to hire an attorney when buying or selling real estate. In some states it is mandated. In California, it has been uncommon to involve an attorney when buying or selling a home. In California, real estate agents, rather than an attorney, commonly assist a buyer or seller with their purchase or sale. While real estate agents are often very knowledgeable about the local market and do provide valuable assistance, they cannot replace the assistance of counsel. Only an attorney can advise a buyer or seller about the legal ramifications of purchase agreement terms. Only an attorney can review mortgage documents for RESPA and Truth in Lending violations. Many buyers over the last 1-5 years are now regretting not hiring an attorney for their recent purchase. Many of the problems California homeowners find themselves in now could have been avoided had they taken precautions during their purchase. Lesson learned. More and more California buyers and sellers are now hiring an attorney to consult with during a purchase or sale of their home.

California Department of Real Estate Investigates Loan Modification Companies

The California Department of Real Estate has issued warnings to consumers regarding loan modification companies. While some companies may be performing services in good faith, many of these new loan modification companies are run by former subprime mortgage brokers who want to have their cake and eat it too. Even legitimate loan modification companies may be in violation of California and/or Federal law if they do not closely monitor their own loan modification practices. For example, the DRE is investigating companies using advance fee agreements and companies that represent borrowers after a Notice of Default has been issued. The law imposes significant restrictions on such companies, and any responsible broker or manager should immediately consult an attorney to ensure they are compliant.

Mortgage Rates Are At Record Lows

Rates on 30-year fixed rate mortgages fell to 4.85 percent this week according to a Freddie Mac report. This is the lowest rate in over 37 years. The low rates are due to the Federal Reserve's effort to assist the stagnant U.S. housing market. Concurrently, mortgage applications are surging, mostly from homeowners aiming to refinance.