When you ask most businesses what first comes to mind when you say the two words “location” and “economics”, they might answer high rent versus low rent. This answer is on point and shows up right on page one of the lease. But stopping the analysis there could be a costly mistake. There are many aspects of location that can have a real impact on your economy – your business’ bottom line.
The City of Los Angeles has its gross receipts tax – a controversial charge levied on all businesses operating in the City at varying rates up to 5%. That top tier will be reduced to just 4.75% in 2016. Oh, happy day! That alone might motivate you to consider other surrounding incorporated cities like Burbank, Pasadena, Glendale, El Segundo, Culver City, and West Hollywood. On the other hand, the city, bowing to this competitive disadvantage has established a three year moratorium on the tax for new businesses starting in or moving to the City of Los Angeles. Indeed, there may be very compelling reasons to locate in downtown L.A. or Century City, but it’s always best to be forewarned and to include city taxes in your occupancy cost analysis.
California’s Proposition 13 has been on the books now for 37 years but remains a double edged sword for commercial real estate tenants. Given that increases in real estate taxes are passed through to tenants in most cases, the cap on year over year property tax increases set by Prop. 13 is a blessing. But you can get blindsided by huge increases when the property you are leasing is sold and reassessed. How to protect against this? Have your broker research how long the current landlord has owned the property. If it has been more than 10 years, the increases in the event of a sale are likely to be big. And do not believe the landlord or their agent when they tell you that they plan to hold on to the property forever. It’s an all too familiar refrain that you cannot hold them to!
It pays big time to have an experienced real estate broker in your corner bringing up these challenging issues and advocating your best interests when negotiating your lease.
Two heads are better than one and might just spare you a migraine.