New (and Really Stupid) Energy Use Disclosure Law for Commercial Properties Took Effect on January 1, 2013

If your operation requires a certain minimum electrical capacity to successfully manufacture your product, have a licensed electrician to verify the electrical supply available in the building before signing the lease.Brokers often use whatever is written on the panel for the electrical power they specify in their marketing materials. This information is likely correct, but also very possibly wrong. Brokers also usually insert language in the lease that seeks to get them off the hook if they screwed up on this . I’ve seen some monumentally bad situations resulting from tenants failing to do this.

Whether your lease is a net lease or a gross lease, you, then tenant, are responsible forincreases in the property taxes levied on the property you are leasing. Proposition 13 in California limits increases in property taxes to an inflation factor not to exceed 2% per year, so increases in property taxes are usually a very nominal cost. However, when a property is sold, it is re-assessed based on the value when the transaction occurs, and the property taxes are adjusted to approximately 1.15% of the assessed value (that’s the average in L.A. County, but it can vary by a very minor amount). Especially for a building that has not traded hands in some time, this increase can be enormous and be catastrophic for a tenant.An example: A 10,000 square foot building has been owned by the same person for the last 30 years, and the taxes are $5,000 per year. It is sold and the property is reassessed by the County at $1,750,000. The new annual tax amount is 1.15% of $1.75M, or $26,250 per year. The tenant is responsible for 100% of this increase, which is $21,250 per year, or $1,771 per month ($0.18 PSF per month).What’s the fix? In an ideal world, your offer should include a provision along the lines of “Lessee shall not be responsible for any increase in the real estate taxes that are the result of the sale or other transfer of the premises”, and this language is subsequently inserted into the lease agreement. In the real world, many landlords simply won’t accept this provision, and in such a case the tenant is rolling the dice on this issue. But many other owners will agree to such a provision, as it’s actually not costing them a dime and would only affect a subsequent buyer of the property who would be unable to pass the increase through to the tenant.

The bottom line: Try to get this provision inserted into your lease. If you succeed, great. If you don’t, economic and market conditions will determine if you pass on the deal or if you decide to proceed with knowledge of the risk. In the real world, most tenants proceed.

Prior to signing a lease, verify that your intended use of the property is permitted by right, meaning that it is classified within the zoning code as a permitted use that does not require a conditional use permit (which can take an extended time to obtain, at considerable cost, with no guarantee of a successful outcome).Just because you see other similar businesses located within the same zone does not mean your use is permitted by right. For example, in Vernon, transportation uses and contractors yards are not permitted in any zone, but you will find them located within the City operating as legal, non-conforming uses that obtained their business license prior to the prohibition.Almost all cities now have their zoning code online (usually within the “Planning” category) which allow you to verify (1) the zone in which the property is located and(2) that your specific use is a permitted use by right within that zone.

If your use requires a conditional use permit (“CUP”), you then need to make additional investigations regarding the time to obtain the CUP, the cost (actual cost to obtain the CUP plus any rent you would be scheduled to pay while in the process of obtaining it), the likelihood of success, and whether you have the ability to structure an exit strategy in your lease agreement if the CUP is denied (i.e. a cancellation provision).

What usually happens: Tenants forget when their lease expires. I call them and alertthem to their upcoming expiration (anywhere from eighteen months to six months prior to the lease expiration date, depending on the building size and their operation (bigger building = more time; manufacturing operations that need CUP’s = more time). I’m actually amazed at how often the lease expiration isn’t even on the tenant’s radar. 

If you are occupying a building on a month-to-month basis and the landlord gives you a thirty day notice to vacate (which they can), you have to find a new space, negotiate a deal on that space and move your operation into the new building in 30 days. For many businesses, this is a nearly impossible task.Along the same lines: Many tenants negotiate tooth and nail in their preliminary lease or lease extension to get an option to extend. Some win, and an option to extend provision is incorporated into their lease agreement or lease extension. Whew. Now they can’t be forced to move at the landlord’s whim. Then, the tenant forgets to calendar the commencement and expiration dates of the notice periods for the exercise of the option. Often, that notice period begins and ends well before the expiration date (i.e. notice period begins eight months and expires six months prior to the expiration date), so it’s often not on the tenant’s radar. It goes unexercised and disappears. Simple fix: Calendar the dates!