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Building Discrimination

It’s not enough that businesses in San Diego and elsewhere in California live in daily fear of power outages — excuse me, “rolling blackouts” — that with little or no notice can shut down operations and threaten one’s means of making a living.

The fact is, many local businesses are in danger of being jolted into financial peril and even bankruptcy while the lights are on. It just depends on what office building the hapless tenant calls home. More specifically, it depends on how many kilowatts the building uses. Yep, that’s right, but more about that later.

First, let’s recap how we got into this absurd situation. Few would argue that the so-called deregulation of power utilities has proved to be one of the more stupid things our state Legislature has done as long as anyone can remember. Just as idiotic, however, is the Rate Relief Act which shot through the Legislature and across the governor’s desk last summer at the speed of light. Under the act’s temporary cap, ratepayers pay only 6.5 cents per kilowatt hour — a fraction of what the wholesale cost is — while the difference goes into a “balancing account” to be paid back with interest after the 2002 general election.

Putting it mildly, the rate relief scheme stinks on most every count. Among the most onerous provisions of this concept is what I alluded to earlier. In the case of commercial buildings, the temporary rate break applies only to buildings that use fewer than 100 kilowatts.

To see how inequitable and outright discriminatory this program is, let’s create a mock but valid comparison between two competitors, both leasing office space in downtown San Diego.

Office tenant Jones and Associates has offices in a small building in the Little Italy section of downtown San Diego. Because it so happens that the building in which Jones leases space uses fewer than 100 kilowatts, the tenant pays — at least temporarily — the below-market rate for electrical power.

Jones’ competitor, Smith & Co., isn’t so lucky. This tenant leases space in one of the larger high-rise buildings just a few blocks away on West Broadway. Because the building is much larger than the one Jones occupies, it uses more than 100 kilowatts — even under the most stringent energy conservation measures. The consequences are that Jones and neighboring tenants who could have never foreseen the present disparity in electricity costs pay full price for their electrical power. They have no protection, temporary or otherwise, from the fivefold increase in utility costs.

Before you assume otherwise, tenants in larger buildings are not typically larger or more well-heeled than those in smaller buildings. The contrary is usually the case, actually, considering that many larger firms occupy single-occupancy buildings that fall under the arbitrary 100-kilowatt cap.

Even in the larger buildings, Smith and his neighbors could take advantage of the rate cap if there were separate meters for each floor — which, typically, is not the case.

Utility costs are passed through directly to tenants as part of their monthly rent. Because Smith leases space in the larger building, that firm is now paying 28 cents per square foot more per month than competitor Jones. For a typical 5,000-square-foot user, that translates to an additional $1,400 a month — just because of an arbitrary cap on how much power the overall building uses. This additional cost not only is unfair from a competitive point of view, in some cases it can make the difference between whether Smith and other companies in large buildings survive.

Lest one holds out hope that the disparity eventually will disappear when the balancing accounts become due, who among us actually thinks that ratepayers under the cap actually will be required to pay back the difference between the capped and actual costs? Given the political consequences of heaping that kind of a balloon payment onto voters’ backs, it’s more likely that California taxpayers will end up making energy providers whole. Not only is Smith and other large-building tenants paying full bore for their electricity, they, as taxpayers, will likely be subsidizing the discounts being presently enjoyed by their competitors who happen to qualify for the temporary rate cap.

As if this particular inequity wasn’t enough, there are efforts presently afoot in Sacramento to overturn the property tax protection afforded by Proposition 13 for large building owners.

How does this affect tenants who rent space in these buildings? Along with utility costs, tenants pay a prorated share of the building’s property taxes as part of their monthly rent. The anti-business “wackos” backing this effort think they are sticking it to the “fat cat” owners of these large buildings, when, in effect, they are attacking the small-office tenants.

Good grief, is it any wonder many small businesses, including a growing number of office tenants, are beginning to think about leaving the Golden State for better times and places?

Jason Hughes is founder of Hughes Marino, an award-winning commercial real estate company with offices across the nation. A pioneer in the field of tenant representation, Jason has exclusively represented tenants and buyers for more than 30 years. Contact Jason at 1-844-662-6635 or jason@hughesmarino.com to learn more.



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