News

Landmark Links May 19th – Opportunists Part II

One Big Thing

With growing hostage demands from the likes of Starbucks, Staples and The Cheesecake Factory, it’s becoming clear that we have entered the looting portion of the economic crisis where everyone looks to take advantage of chaos to improve their own position, whether they experiencing actual distressed or not.  In addition to the bad corporate actors, opportunist politicians are also getting into the act with asinine policies that would generate even more economic upheaval but will resonate with select constituencies come November.  Today’s example: California Senate Bill 939 (h/t Ron Harari).  From California Globe (emphasis added):

Senate Bill 939, written by Senators Scott Wiener (D-San Francisco) and Lena Gonzalez (D-Long Beach), would give tenants much greater power in rent renegotiations due to decreased business caused by the lockdown. If landlords and renters don’t agree to a new rent price based around how much the business is now taking in with only take-out and limited dining capacity customers, renters could end their lease without declaring bankruptcy or being sued by the property owner. The renter would not have to pay any future rents as well, but with the caveat that all back rents up to lease termination would still need to be paid.

Publicly traded companies would not be covered under SB 939.

A halt of commercial evictions for small businesses and non-profits affected by the lockdown would also be enacted as part of the bill. These businesses cannot be evicted until either 2 months after the end of the statewide lockdown or by the end of 2021, whichever comes sooner.

First off, this is clearly well-intentioned- if terribly executed.  Unlike say, Starbucks, who doesn’t want to help out struggling small businesses?  The problem is that it opens up a Pandora’s box of unintended consequences and is incredibly naive in its structure.  Here are four major issues with the legislation (I’m sure there are more):

  1. This is a blunt solution to a complex problem and is not holistic in its approach.  If the landlords have debt against their properties, they are now stuck in between a rock (a tenant with one-sided bargaining power under this bill) and a hard place (a lender to whom they own a monthly mortgage payment – not to mention other operating costs, property taxes, etc).  The resulting fallout would likely be a wave of defaults and, eventually would impair lender balance sheets, unleashing an even larger crisis.
  2. Landlords and tenant enter into a legally binding agreement when they execute a lease.  If one of the parties runs into financial  difficulties, they are free to approach the other one to request an amendment to said agreement.  However, this should be handled by the parties that are principal to the agreement, not by government fiat that favors one side.  One of the main attributes of the United States that makes investing it so attractive is the rule of law.  If California takes this step to invalidate contracts, it becomes a virtually un-investable banana republic.
  3. “Small business” is only defined in the bill as a business that is not public.  Under this definition, a VC backed unicorn worth billions would benefit and be able to legally stiff its landlord.  This is a classic example of politicizing the big bad landlord versus poor little tenant trope.  It is not at all how things work in the real world.
  4. There are huge incentives for tenants to sandbag numbers in order to get a better deal from their landlord.  Bad actors will absolutely take advantage of this.  To think otherwise is childishly naive.

Under normal circumstances, I would read something like this and write it off as another kook in Sacramento trying to make a with a bill to win over a certain constituency in the next election.  The bill would never pass and the legislator would be able to use his or her support for it in an election mailer.  However, these are not normal times and desperate people are more willing to make irrational decisions under pressure, consequences be damned.

The solution here is as simple as it is painful.  Every tenant, landlord and lender that is struggling needs to communicate with each other and work together to ensure that each of them has the best chance of survival possible.  Its not in the interest of a landlord or lender to see a tenant go out of business or vice versa.  However, this should be handled by those parties, not the government.  We are headed in a dangerous direct, and if this passes, there is likely no going back.

What I’m Reading

Roll Up: The post pandemic fallout will spur both hotel industry consolidation and conversion of some hospitality properties to other, more productive uses.

Designed to Fail: This fascinating blog post about a pizza restaurant arbing its own product on Doordash perfectly sums up SoftBank’s business plan:

He messaged me asking me if I knew anything about Doordash, and oh boy, did I get Softbank-triggered. I had just read about their $400 million Series F and it was among the WeWorkian class of companies that, for me, represented everything wrong about startup evolution through the 2010s. Raise a ton of money, lose a ton of money, and just obliterate the basic economics of an industry.

Echoes of the Past: A whistle-blower complaint submitted to the SEC last year throws some major shade at big banks and their CMBS desks.  Not sure if this is legit or not but it sounds rather familiar.  From Pro Publica (emphasis added):

Lenders and securities issuers have regularly altered financial data for commercial properties “without justification,” the complaint asserts, in ways that make the properties appear more valuable, and borrowers more creditworthy, than they actually are. As a result, it alleges, borrowers have qualified for commercial loans they normally would not have, with the investors who bought securities birthed from those loans none the wiser.

On the Road Again: The hospitality industry’s pain could become the RV industry’s gain.

Maybe I’ll Just Drive: From miles of lines to temperature check stations, masks and Plexiglas everywhere, the new normal for airports sounds like a dystopian hell.

Charts of the Day

These charts perfectly encapsulate conditions that lead to what I have been referring to as balance sheet fortification.  When people anticipate that their financial condition will deteriorate, they will cut spending and put off large purchases.  While households are now more optimistic about their current financial condition, their expectations about their future finances continue to deteriorate.

Source: @TheTerminal

The NY Fed’s survey confirms this trend.  Again, someone who expects their finances to deteriorate in the next 12 months will put off big life decisions and purchases consistent with economic expansion.

Source: FHN Financial

WTF

Only Fans: A South Korean soccer club has issued an apology for filling a stadium with x-rated sex dolls during a match.

Let it All Hang Out: A man was arrested for exposing himself to a woman drinking coffee on the porch of her condo because Florida.

Food Fight: A man was arrested for striking his wife in the head with a piece of raw chicken during an argument because Florida.

Landmark Links – A candid look at the economy, real estate, and other things sometimes related.

Visit us at Landmarklc.com