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# Government should remember little people
- URL: https://www.smdp.com/government-should-remember-little-people/
- Published: 2006-02-14T16:00:00.000Z
- Updated: 2026-10-24T23:13:04.000Z
- Author: David Pisarra
- Tags: Opinion, Santa Monica, #archive-import

*WHAT’S THE POINT?*

A budget surplus means that a new terror is soon to arrive for many small companies in the Southland, Santa Monica in particular. The coming shocker is arriving with their latest statements from their commercial landlords.

Most small businesses do not own the building in which they are housed. Traditionally, a small company is leasing space from the actual owner. That’s because most companies do not start out with the capital to buy a building, and what little capital they do have needs to be focused on the business itself.

Getting a company up and running is a cash intensive process, one that requires an iron will, and a strong resolve to survive. For those lucky few who make it past a year, they are about to find that a clause in their lease is likely going to dip into their company profits quite substantially in the near future.

Commercial leases traditionally are set up so that the tenant pays all the expenses of operating the building, which is called a triple net lease. It means that the landlord can either maintain the property and pass the charges on to the tenants, or that the tenants will maintain the property to the satisfaction of the landlord.

In large buildings, such as the Colorado Center, the owner hires a property management team who make sure that the lights are working, the gardening is taken care of, the parking structure is cleaned, and then they pass these charges on to the tenants. Each tenant is responsible for their common area maintenance charges, known as “CAM” charges in the trade. Those charges are normally passed on to the tenants by way of a calculation of the percentage of the building they occupy. For example, if you rent a two-person office of 750 square feet in a 7,500-square-foot building, you would be billed for 10 percent of the CAM charges annually.

When deciding to rent a space, a tenant needs to be aware of what the historical charges are so that they can budget for them in their business plan. By looking at what the charges were last year, a prospective tenant can estimate what they will be next year.

Once established, the charges are generally not going to change all that much from year to year. The costs of keeping a parking lot clean, and changing lightbulbs are fairly stable.

But there is a hidden cost that tenants frequently forget about — until they are told they must pay a lot of money. And that is property tax. These hidden demons that landlords love to pass on but rarely discuss when wooing a new tenant can be crippling to a tenant.

For the pie-eyed new business owner, who has dreams of their company taking off like the next Apple, and being able to retire to Aruba with a private yacht full of youthful, handsome and striking deck-hands, the crushing reality of property taxes is the least of their concerns.

That is until the property manager comes knocking and wants to add $30,000 to their CAM charges.

This nightmare scenario is playing itself out across the land as many property managers are now updating their calculations and reviewing leases.

A business that has been operating for a while will become complacent, and this is not going to shock them, unless they are in the unfortunate group of business owners whose landlords have recently changed.

Proposition 13, the ever-popular state constitutional amendment that pegged property taxes to the last sale price has kept property taxes at a manageable level for homeowners for almost three decades now. This piece of legislation has created an environment of growth and stability in the California economy. But it has a catch. Upon the sale of the property, a new tax amount is established.

In residential property this is generally not a problem, because the new buyers are aware of it and budget for it. But for business owners, that re-appraisal of the tax amount can be an unexpected, unforeseen and crippling shock to the system.

A business owner, who is renting their space, may have no change in their business model, no increase in their revenues and net income, may have quite a shock coming. If the landlord, who has owned the building for the past 10 years, and kept the property taxes low as a consequence of holding the property, suddenly sells the building, taking their increased appreciation and moving to Aruba for the yachting, the tenant will have a huge increase in their property taxes and nothing in their control can be done about it, to prevent the effective killing of their profit margin.

Depending on the business, and how much space is rented, this can be a minor annoyance, or a major killer. If as a lawyer, I was renting 400 square feet in a 20-story building that had 200,000 square feet of offices, my percentage is only 0.002 percent, so if the property taxes go from $1 million a year to $10 million my actual cost increases from $2,000 to $20,000\. That may seem like an absurd assumption, but there are building in this city that have been held for decades by the same person or company, and have recently been sold, or are in the process of being sold.

On the other hand, if I occupy the entire building, and the owner sells the company after holding it for 10 years I can expect to have a significant tax bill. One that perhaps could put me out of business.

Looking at how much properties have appreciated in the past 10 years, there is no doubt that many companies are going to be facing some huge tax bills in the near future as major commercial properties change hands. In the short run, it leads to increases in tax revenue for the state and the local governments. In the long run, companies going out of business costs us much more in terms of jobs and a robust economy.

It is part of the cycle of life, and we need to be aware of it as business owners, as clients, and we should ask that our City Council keep it in mind when spending today’s surplus, because it may be tomorrow’s shortfall. (David Pisarra is a business development lawyer in the Santa Monica firm of Pisarra & Grist. He welcomes your questions and comments. He or (310) 664-9969.)

*Originally published in the Santa Monica Daily Press print edition on February 14, 2006.* [Read the original PDF.](https://s3.us-east-1.amazonaws.com/smdp%5Fbackissues/021406.pdf?ref=smdp.com)