Real estate industry interests are concerned about a bill making its way through the Indiana General Assembly that would give tenants of residential and commercial property the right to terminate their leases without penalty if a property goes into foreclosure.
Critics say Senate Bill 225, introduced by Republican Sen. Theresa Lubbers of Indianapolis, would make commercial properties less attractive in the eyes of lenders if tenants are allowed to disregard leases.
The legislation also requires lenders to provide written notice to tenants within 10 days of a foreclosure filing. The goal, Lubbers said, is to protect residential renters from being forced out of their properties without warning.
“This was, for me, really about notification,” she said.
The bill was initially introduced with a focus strictly on residential properties, Lubbers said. Republican Sen. Brent Steele introduced the commercial aspect during the committee stage, she said. Steele did not return an IBJ call seeking comment.
Lubbers said she wants to continue to focus on providing foreclosure notification to residential tenants, but would be willing to do away with the commercial element.
The bill passed 48-2 in the Indiana Senate and is now up for consideration in the Indiana House. It would apply to residential properties and commercial tenants unless the commercial real estate is leased for a period of more than three years, although the specifics of such a rule remain unclear.
Rory O’Bryan, a partner at Harrison & Moberly who also teaches real estate finance at the Michael Maurer School of Law at Indiana University, said the bill could dramatically affect how properties are valued in the state.
“It’s like using a sledgehammer to drive a thumbtack,” he said. “You’re affecting every property … every rental property that’s going to be bought or sold in Indiana is going to lose value on account of this law.”
Lenders make loans assuming leases will survive in a foreclosure, he said. If the bill passes and disrupts that arrangement, financial institutions may become reluctant to invest in Indiana properties for fear that a foreclosure could wipe out all the leases.
Bob Lindgren, a principal at Grubb & Ellis Harding Dahm & Co., agreed.
“Commercial property that is multi-tenant is valued primarily on its ability to produce income,” he said. “If you empty a building of tenants, then it has significantly less value than it does when it has tenants in place.”
Lindgren said the legislation as it stands would cause lenders to factor in a higher level of risk when loaning funds to Indiana property owners.
“It will make funds less available and the funds that are available will be more expensive,” he said.
Legislators in other states have introduced laws in the past few weeks calling for foreclosure notification. But the early termination proposal is unique to Indiana, O’Bryan said.
“I don’t think there’s anything like this going on in other states,” he said.
Last week, the Indiana House passed a similar piece of legislation, House Bill 1081, which calls for foreclosure notification. However, that bill does not include a clause allowing tenants to terminate their leases if landlords face foreclosure.
Stan Evans, the legislative committee chair for the Indiana Commercial Board of Realtors, said the House proposal is much more attractive to property owners and lenders.
“We’re trying to steer our members to supporting the House version,” he said.
The Senate bill, he said, would only complicate the current economic crisis.
“The financing world is so difficult right now anyway,” he said, “the last thing commercial real estate needs is another obstacle to financing and we think this would be one.”