Today’s soft commercial real estate market has created many opportunities for savvy companies, yet, with opportunity comes risk. And it’s a situation that most managers will soon face. Because every year seven percent of the nation’s commercial real estate leases expire; and according to a recent NACORE study almost 80 percent of major US companies are planning to relocate or expand their facilities within the next three years. Even companies not looking for space must be careful. Many buildings that are now renting for less than $25 a square foot were built based upon projected rents of $30 to $45 a square foot. Forcing landlords to become increasingly creative in finding ways to maximize their cash flow. A common trap for tenants is the annual increase in operating costs or “pass throughs.” Originally designed to protect the landlord against increases in utilities, property taxes and operating expenses. Now, landlords see pass throughs as a profit center. While operating costs vary by geographic area, in most major U.S. cities they run from $7 to over $9 per rentable square foot per year. Overcharges of a $1 or more per rentable square foot are common. When multiplied by the term of a tenant’s lease and the number of leases in a landlord’s portfolio this amount can grow to an astonishing figure. As we uncovered for one client. Their landlord had understated the base year operating expenses by $250,000. Then overstated the building’s square footage by 25,000 square feet when adjusting the operating costs to 100 percent occupancy. A nickel here, a nickel there and presto – an extra million dollars in the landlord’s pockets! Even for small tenants this can mean substantial extra costs. During a lease review for a 3,500 square foot branch office, we found the landlord had overcharged $9,500 for operating costs in the first two years of their five year lease. Overcharging tenants 10 to 15 percent is not uncommon, but here it was 38 percent! In the audit, we found another item that allowed us to negotiate a rent reduction of $60,000 for the remaining three years of their lease. Pitfalls, Land Mines And Booby Traps Lurking inside almost every tenant’s lease are loopholes, traps, major ambiguities, and dozens of issues that were never discussed. Buried among the legal rights and obligations are hidden costs, unreasonable risks and outright mistakes that could have expensive consequences. From the tenant’s standpoint they are poorly drafted. The language is unclear and important clauses omitted. Even the most sophisticated of companies, architects, attorneys and experienced real estate professionals can overlook the most basic item. That’s what happened to a major financial services firm that leased several floors in a major office building. After moving in, they learned that their gross lease didn’t include janitorial service. It was irrelevant that gross leases in that city’s first class buildings usually included cleaning services. “If it ain’t in writing, you don’t get it,” was the landlord stand. The firm is now paying an extra $100,000 a year for cleaning. The need for landlords to fill their buildings in this weak market has given many tenants the opportunity to cut their rent and move into new buildings. Still, for the unprepared there are some very costly pitfalls. When the developer of a Times Square high rise offered a major New York law firm a lease that was $10 per square foot less than their old lease, they moved into 423,000 square feet at Broadway and 47th Street in late 1990. Yet,unable to lease any of the other 33 floors of the 42-story high-rise near Times Square in Manhattan, the project soon became financially strapped. As the grime slowly built up on the windows, other signs of deferred maintenance appeared. Elevators were slow to arrive, landings were bumpy and call buttons didn’t work. The heat was out for weeks in the early spring of 1991 and work stopped on the building’s exterior. Then, the partnership that owned the building declared bankruptcy. In 1994, the building was finally sold for half its construction costs. Since foreclosures have become a fact of life, your landlord today may not be your landlord tomorrow. That’s why so called boilerplate issues like subordination, non-disturbance and attornment are important to tenants. When lenders take back a building – they can legally tear up leases and evict the tenants. That was the case when a North Carolina bank took back an office building in Nashville and evicted 15 tenants. Why would a lender evict rent paying tenants? By giving the tenants the boot, the bank could then sell the four story building to a major tire manufacturer, that was relocating its headquarters to the area, and get a “non performing loan” off their books and keep the government off its back. Avoiding The Lease From Hell Landlords are in the business of leasing space. They have calculated every angle far before any negotiations with help from: asset managers, attorneys, financial analyst, property managers, real estate brokers, risk managers, architects, space planners, engineers and contractors. Tenants, on the other hand, often do not have the financial, professional or personnel resources commanded by the landlords. Despite their expertise and success in their core business, they are in foreign territory and outnumbered when it comes to dealing with the maze of fine print and legalisms in a lease. A lease is a very complex document that often contains hundreds of small agreements. Sometimes, just changing one or two words can be the difference between a fair lease clause and trouble. Here are a 25 questions from the book; “327 Questions To Ask Before You Sign A Lease.” They can be used to find costly loopholes and uncover potential problems when negotiating a new lease. You also can use them to review your existing leases. A review can expose thousands of dollars in overcharges for operating expenses, tax assessments, errors in calculating CPI adjustments, security deposit interest, and lots more. All the questions can be answered either yes or no. A no answer is a red flag, warning you to take steps to protect yourself. The idea of using a check list may seem simplistic. Yet, it is a very effective tool for making sure nothing is overlooked and prevent problems. 1. Does the lease specifically state the square footage of the premises? 2. Is the total rentable square footage of the building specifically stated? 3. Is the tenant’s pro rata share based on total square footage in the building instead of the square footage leased by the landlord? 4. Do the base year expenses reflect full occupancy or adjusted to full occupancy (for example, the base year real estate taxes are low because they are based on an unfinished building)? 5. Must the landlord provide a detailed list of expenses prepared by a certified public accountant (CPA) to support the increase? 6. Does the lease clearly give the tenant the right to audit the landlord’s books and records? 7. Is any increase in operating expenses due to of another tenant’s “particular use” excluded from operating expenses? 8. If the tenant’s use is limited to the use stated in the lease and no other use. Does the lease provide for: “except concerning an assignment or subletting, in which event any change in use required by the transferee shall be subject to the prior written consent of the landlord, which consent shall not be unreasonably withheld or delayed?” 9. Is there a dollar limit on the tenant’s obligation to make changes to the premises to comply with all municipal ordinances and state and federal statues after the commencement date? 10. If the landlord becomes aware of any hazardous substances, hazardous materials or hazardous wastes in the building or the premises is the landlord required to give the tenant prompt notice? 11. Are the janitorial service standards specified in an exhibit, such as emptying waste baskets nightly, washing the exterior windows once a quarter? 12. If the services are interrupted, does the lease define the remedies available to the tenant; money damages, rent abatement or lease cancellation? 13. Is the landlord, required to complete or correct the “punch list” items within 30 days or be in default? 14. If the landlord does not meet its responsibilities for repair and maintenance, can the tenant make the repairs upon 10 days notice (or without notice in an emergency), and deduct the costs of the repairs from the rent? 15. Does the lease say any repairs, alterations or other improvements required by any governmental authority that is required of the building in general, or similar buildings or uses in the area of the building, shall be done at the sole cost and expense of the landlord? 16. If the landlord fails to notify the tenant of the assessment (or reassessment) in sufficient time to permit the tenant to contest the assessment, can the tenant exclude any increase resulting from the assessment from the taxes the tenant pays? 17. If the tenant is seeking to sublease only a portion of the premises is the landlord precluded from recapturing the entire premises? 18. Is the landlord required to obtain non disturbance agreements from current and any future lenders? 19. Is the landlord required to subordinate its contingent interest in the tenant’s personal property and fixtures to the tenant’s lenders? 20. Does the lease say any lease modifications requested by a lender cannot alter the basic business terms (rent, location, term)? 21. Can the tenant use an umbrella or blanket insurance policy that also covers other premises owned or leased by tenant? 22. Is the waiver of subrogation unlimited, instead of limited only to the amounts of insurance proceeds received? 23. Does the lease clearly define how disputes are decided? 24. Is everything the tenant negotiated, such as free rent, increased tenant improvement allowance, caps on operating expenses increases, stated in the lease and its exhibits? 25. If the lease is subject to mortgagee approval, is the lease automatically void, if the tenant does not receive written notice by a certain date that the lease has been approved? Real estate often represents a firm’s largest single financial commitment, and its largest annual expense other than payroll. It can have a major impact on earnings for many years. Avoiding just one trap can save thousands or maybe millions of dollars each year. In today’s economy, one cannot afford to be caught unprepared. The stakes are just too high. Alan Whitson, RPA is CEO of the B. Alan Whitson Company, a Newport Beach California firm that serves the real estate needs of many well known organizations. He is the author of numerous articles, books and software packages on corporate real estate and economic development. For more information or to order books or software, contact B. Alan Whitson Company at (714) 955-1200.

Seven company insiders at fast-growing Digital Insight Corp. have simultaneously unloaded almost 20 percent of their equity in the company, netting them a total of $76.9 million. The Aug. 4 sell-off was tied to a July 31 secondary offering by the Calabasas-based company, a leading provider of Internet banking services. “This is considered to be the most orderly way for the insiders holding the stock for some time to get some liquidity on their investment,” said Digital Insight President John Dorman. Digital Insight’s Douglas Carlisle, H.D. Montgomery, Mark Siegel, Michael Laufer and Thomas Bredt each sold 356,348 shares of common stock at $31 per share on Aug. 4, and now each indirectly hold a little over 2 million shares, according to First Call/Thomson Financial, a company that monitors stock ownership. Director John Jarve sold 356,348 shares at $31 each, and company executive Sonja Hoel sold 341,985 shares. As of late last week, Digital Insight’s stock was trading at about $26 a share. That compares with its 52-week low of $19 a share in September 1999, and its 52-week high of $86 on Feb. 10. Paul Elliott, an analyst with First Call, said the insider sales are not alarming. “What you don’t want to see is the insiders really clearing out of their position at low prices, but this doesn’t fall into that category,” Elliott said. “It’s a way for the company to raise money, and a way for the insiders to sell some of their stock. It was just a way for them to turn their stock into cash.” He added that the sale is no reflection on the company’s prospects. “My original take on it would be, it’s not a good thing that insiders are selling at these prices,” Elliott said. “But at the same time, I don’t think it’s anything to get excited about.” Vincent Daniel of CIBC World Markets, an analyst who covers Digital Insight, agreed. “It does not mean the company is in trouble,” he said. “It’s a normal course of venture capital’s cycle.” Companies such as Digital Insight often have voracious appetites for cash, which is needed to fuel their rapid growth. The company has grown from 75 employees to roughly 650 since the end of last year, and hopes to hire up to 300 more by December.

actor glen steele was working too hard landing roles to run his takeout business, so he changed gears and turned things around Glen Steele was a 29-year-old actor picking up rent money by making deliveries, when he decided it was time to settle down. Steele grabbed a pencil and paper and started running a restaurant delivery service from his home. To his surprise, Cuisine to You grew to nearly $1.5 million in revenues in just two years. But success caught the overnight entrepreneur unprepared for managing a full-blown business. As it grew, Cuisine to You no longer had the infrastructure it needed to operate effectively. Worse yet, Steele took a step back from the day-to-day operations because he was unwilling to give up his dream of becoming an actor, leaving many of the daily decisions to someone else. Five years later, Steele has learned plenty of valuable lessons. After retrenching, he has rebuilt Cuisine to You, investing in technology to help the company run more cost effectively and setting the stage for future growth. “Our growth was fast, but at the same time, we would be bigger today if I hadn’t mismanaged the business,” Steele said candidly. “I didn’t know what I was doing. Here I was an actor, and I go in two and a half years to a business of over $1 million when balancing my checkbook was a challenge.” Cuisine to You operates on a simple premise: working couples don’t have the time or inclination to cook at home for their families, and they’d rather pay a modest fee to have dinner, not just fast food, delivered to their door. Further, businesses often want lunch delivered to the office and don’t want to send an employee out to get it. “I think they’re great,” said Jennifer Ahlquist, who works in radio promotions at Hollywood Records, a frequent Cuisine to You customer. “We order from them every Monday and Tuesday because we’re too busy to step out of the building. It’s prompt and courteous, and there’s all different kinds of stuff, so we never get bored.” Inside the business Studio City-based Cuisine to You has agreements with about 15 different restaurants in the San Fernando Valley, ranging from The Good Earth to Cha Cha Cha. Customers can order from one or more of the restaurants, and Cuisine to You collects a $5 service charge for each restaurant from diners and a percentage of the meal check from the eatery. The tab for lunch orders averages about $70. For dinners, it is about $40. Steele got the idea for the service from another restaurant delivery company where he worked in Beverly Hills. Not wanting to compete directly with his former boss, he decided to open up shop on the other side of the hill, serving a territory that runs roughly from Burbank on the east to Encino on the west, and from Mulholland Drive to Victory Boulevard. At first, growth was extremely rapid: from $93,000 in revenue in 1993, the company jumped to $1.4 million in 1995. With business booming, Steele expanded the company’s territory to include Pasadena and Brentwood. But with each of those additions, he had to set up new call centers with new equipment, staff and phone numbers. The more he expanded, the higher his cost structure, and costs were eating up the company’s profits. “I didn’t put enough money back into the business to facilitate the growth,” Steele said. “I let it grow by itself.” Several years ago, Steele took stock of the business and realized he needed to make some changes. He closed the Brentwood and Pasadena offices, added an 800 number and began developing a Web site. He also returned to managing the business full-time. Revenues declined, largely because of the closures, but Cuisine to You was earning more money on the business it did generate. “Instead of trying to see how big I could get, I restructured to see how profitable I could be,” Steele said. The 800 number enables Steele to operate with one call center in one location instead of setting up offices to cover each new territory. “I can basically go into another market at one-third the cost I could before, and give it a year to grow with virtually no cost,” Steele said. “Before, every time I opened a new market, it was like opening a new business.” Going online The company’s Web site, www.cuisinetoyou.net, went live several weeks ago. Customers can use the site to peruse the menus and call in or fax their orders, or they can handle the whole transaction on the Internet. If a customer orders on the Web site, a hard copy of the order automatically prints out at the call center. With the new structure and systems in place, Cuisine to You opened a second location in the South Bay, where the restaurant selection includes McCormick & Schmicks, Tequila Willie’s and Soleil. Steele would like to open an additional two markets in the next year.

Decades from now, when historians and academicians look back on the development of Los Angeles County, Bob Stine, the head of Tejon Ranch Co., could be remembered as a visionary or a dreamer. It all depends on the success or failure of his bold plan to develop a 6,000-acre new city in north L.A. County atop the Grapevine near Quail Lake, a good 45 minutes north of Santa Clarita along the Golden State (5) Freeway. During a recent interview, Stine offered his views on L.A.’s exploding population and his vision for accommodating a major portion of it. Question: What do you say to critics who argue it’s premature to talk about developing a new town so far to the north? Answer : California is continuing to grow as the sixth or seventh biggest economy in world. The state’s population is projected to grow from 32 million to about 40 million over the next 10 or 15 years. It’s not realistic to think everyone is going to live along the coastline. Tejon Ranch can provide a great environment for a portion of that growth. We’re right in the path of it. Q: Newhall Land has 9,000 homes slated for Valencia and another 21,000 planned for Newhall Ranch. How do you expect to compete against those projects? A: Given the (environmental) challenges Newhall has faced, we think their pricing is going to be quite a bit more expensive than what ours would be. Our pricing would probably be lower than Newhall Ranch but probably higher than Palmdale and Lancaster and with a better climate. Q: From what areas do you expect to draw homebuyers? A: Predominately Los Angeles County, but there are a number of people who live in Kern County in the Bakersfield area who commute and work in the north end of L.A. County. I think we’ll get a certain percentage from Kern County as well. Q: Aren’t you worried about the enormous costs of providing the infrastructure needed for a new city the roads, schools, police and fire stations? A: It’s always a critical, key element for any project. We’re going through the modeling and planning right now with our partners to project all of those costs. Certainly it’s going to cost hundreds of millions of dollars over a period of time, but we think we can provide the necessary services at an affordable price. Q: But won’t the project result in yet another bedroom community? A: If you look at the development of Valencia, in the early years you probably had the majority of people not working there but commuting to some other part of greater Los Angeles. Now, over a period of time you have a very balanced community with a huge employment base. I think the same will be the case for our project. It would be a balanced, master-planned community with its own commercial, industrial and business center. Q: Newhall Ranch has been stalled over questions relating to water. Where do you expect to get the water to serve your residential project? A: We believe we have a dramatically different situation. The Quail Lake area, where we’re planning our community, is located in the Antelope Valley/East Kern Water District, which has a very large surplus entitlement from State Water Project of tens of thousands of acre-feet. They come to us looking to sell water. In addition to that, Tejon Ranch has its own entitlement from the state of nearly 25,000 acre-feet. So we have multiple sources of water that are more indigenous to the immediate area. That’s a very different situation from what Newhall Ranch has experienced. Q: How long do you expect it to take for Rolling Meadows to come to fruition? A: Realistically in L.A. County, to do all the proper planning and go through the environmental impact reports and satisfy the California Environmental Quality Act, you’re probably looking at a minimum of three years, probably longer (to complete the planning process). This community is probably a 15-year-plus project. It’s a lengthy period of time for sure, but that’s one of the reasons why we wanted to work with partners who are all big, long-term builders. Q: Newhall Land made the transition to real estate development years ago. Is it fair to say Tejon Ranch is following Newhall’s lead? A: In terms of our location in the greater L.A. basin, being 35 miles or so farther out, our development potential is coming after Newhall. We look at ourselves somewhat like Irvine maybe 35 years ago, and maybe the way Newhall was 25 or 30 years ago. We think our turn is coming. Q: How did you end up at Tejon Ranch Co.? A: In the beginning of ’96, the Tejon Ranch board of directors was seeking a new CEO, someone with a real estate background rather than primarily ranching and cattle. A search firm contacted me, and I started talking with the board about the future of Tejon Ranch and long-term planning for its land holdings here. It was a unique opportunity.

A couple of years ago, officials at Camarillo-based software-maker eLabor.com (then jeTech Data Systems) decided it was time to transition their time-management and employee-management software to the Internet. The privately held company had built up a successful business since the early 1980s helping employers manage and monitor their employees’ time and workload. But they foresaw an even bigger market if they could offer those services online rather than with a costly software system that took months to install and required support staff. ELabor officials surveyed the online workforce management market and saw lots of small competitors and one giant Microsoft Corp. “We saw these small players trying to go head to head with Microsoft when their tools were already the standard,” said eLabor founder and Chief Executive Michael Edell. So rather than compete with Microsoft Project, the software giant’s resource management package, eLabor decided to build its Enterprise Project system to complement the Microsoft package. It paid off. In August, Microsoft partnered with eLabor, agreeing to participate in the company’s second round of venture funding and to integrate eLabor’s Enterprise program into Microsoft’s upcoming Project 2001. “Microsoft has stepped up and said, ‘This is the company you need for project management software, this is the company to go to,'” Edell said of the Microsoft deal. Since the deal was announced, sales of eLabor’s online management package have exploded, thanks largely to all the media attention it received in the wake of the deal. Edell wouldn’t release numbers, but said August sales have already surpassed total sales for all of 1999. “The eLabor.com product fit nicely into the gaps of our existing ‘Microsoft Project’ without too many overlaps,” said Chris Tibbetts, product manager of “Microsoft Project.” Tibbetts said Microsoft was also attracted by the fact that the product was already completed and could be put out in the market sooner than a copycat product developed by Microsoft. ELabor is still running in the red and Edell said the company doesn’t expect to turn a profit for another 10 to 12 months. In August, eLabor took in $40 million in a second round of financing that included investors Redpoint Ventures, Lehman Brothers and Microsoft.

For years, executives at Culver City-based Bristol Park Industries had seen relatively modest gains in sales of their chief product: a transformer designed to reduce the amount of electricity needed to power interior building lights. But this summer, the number of inquiries for Bristol Park’s custom-made transformers has tripled over last summer. In fact, the inquiries are coming in so fast that the company now has its biggest backlog ever. The reason? Soaring electricity prices in Southern California have increased interest in once-obscure products like these voltage-reducing transformers. And that’s providing a welcome boost to the fortunes of companies like Bristol Park that have long toiled in the energy-efficiency market. “This has been a huge windfall for us,” said Bristol Park Marketing Director Tim Walcott. “We’ve received two dozen inquiries from government and private industry down in San Diego just in the last four weeks, which is far above what we ordinarily get, even in summer.” Bristol Park is not alone. Across the region, companies that make products that reduce electricity consumption or increase the reliability of power supplies have seen similar increases in inquiries, as big and small power users alike look for ways to keep costs down. Traditionally, many electric power consumers including businesses tended to dismiss such power-saving equipment, because with relatively low electricity rates, they figured it wouldn’t be a worthwhile investment. But as bills have doubled or even tripled, that appears to be changing. “This business has always been dominated by one key principle: payback, or how long will it take to save enough on your power bill to offset the up-front cost of putting in this power-saving equipment,” said Arthur O’Donnell, editor and associate publisher of the Bay Area-based California Energy Market Newsletter. “And by and large, the payback period has been too long for most companies.” And especially for those with their eye on the next quarterly earnings statement. But now the payback period has suddenly become much shorter. Investing to save money “What once took three years to pay back now takes two years or even less, and that’s something that people are more willing to consider,” said Kris Kimble, business development manager for Costa Mesa-based Lighting Technology Services. The company is essentially an energy-efficiency contractor: It conducts energy audits for owners and managers of buildings, two-thirds of which are in L.A. County. Then it obtains electricity-saving devices from various manufacturers including low-power lighting, voltage regulators, energy-efficient air conditioning chillers and variable-speed motors and installs them in the buildings. So far, Kimble said the number of projects in the company’s pipeline is running between two and three times last summer’s level. Because the work often takes six months or more to complete, Kimble said, actual sales increases from this summer’s higher workload won’t register until late this year or early next year. Major businesses that have started installing such devices in Los Angeles facilities include New York-based Starwood Hotels & Resorts Worldwide Inc., which owns the Westin and Sheraton hotel chains. In the last two months it has begun retrofitting lighting systems and installing new energy-efficient air conditioning chillers and variable-speed motors at its hotels in Southern California and New York state. “These two areas have seen the highest electricity price hikes this summer, so that’s why we’re targeting them first,” said John Lembo, Starwood’s director of energy operations for the North American region. As more and more companies like Starwood begin to review their energy consumption, more inquiries are coming in to those companies that make power-saving products. Another such firm is Torrance-based LEDtronics Inc., where inquiries have more than doubled this summer. LEDtronics makes “light emitting diode,” or LED, bulbs that use only about 10 percent of the electricity of standard bulbs. “The increase is primarily because of the high power bills, not just in Southern California but also in other parts of the country,” said LEDtronics President Pervaiz Lodhie, who added that the size of the increase in inquiries is unparalleled in the company’s 16-year history. “The payback period is now much faster; for many companies we deal with, it’s gone from something like seven years down to two or three years because the electricity prices are so high.” Success stories Like many other executives with energy-efficiency firms, Lodhie said the increase in inquiries over the summer has only now begun to yield actual sales. However, the sales impact has been more immediate for Simi Valley-based Premium Quality Lighting, which makes energy-efficient light bulbs for such clients as Staples Center and Burger King Corp.’s Southern California restaurants. President Andy Sreden said the firm’s sales have increased 39 percent since the first quarter, with most of that increase coming in the last two months. He said the increase this year has far outstripped the slight increase last year. “The companies coming to us now really want to achieve savings on their power bills,” Sreden said. And it’s not just energy-efficient light bulb makers or distributors who are benefiting from the skyrocketing energy costs. Chatsworth-based Capstone Turbine Corp. has seen a five-fold increase in the number of inquiries between early June and early September. Capstone makes small turbines that companies can install on site to reduce the need to rely on the overall power grid; not only does this increase the reliability of a company’s power supply, it also reduces the need to purchase power from the grid at high peak-usage-level prices. “In the San Diego area, the number of inquiries we’re getting is magnitudes of order greater than anything we received last year,” said Capstone spokesman Keith Field. “There’s no question that many of these inquiries are being driven by high power bills.” Some of those inquiries at Capstone have already translated into sales. The company has sold 339 units so far this year, compared to 220 for all of last year. But while interest in Capstone and other energy-efficient firms has skyrocketed this summer, the challenge is going to be to keep that interest high and translate it into a steady stream of orders, especially if power prices drop. “It all hinges on whether these high power prices continue,” O’Donnell said. “So far, the price spike hasn’t lasted long enough for most companies to change the way they consume electric power. That really won’t kick in unless we see several more months of this, or a repeat next summer.” And it’s hard to predict what will happen next summer. “Right now, we’re seeing a trend toward price caps. If regulators continue to resort to these price caps next summer, you may not see such high power bills and companies might not be as driven to make these investments,” O’Donnell said. “But on the other hand, it may bring us to a brink of a reliability crisis. At that point, a whole new set of market dynamics kicks in.”

Edward L. Masry only intended to do a favor for a friend when he found himself hip deep in alligators back in 1993. What started out as a relatively straightforward real estate negotiation on behalf of a resident of Hinkley, Calif., turned into a case of toxic contamination of groundwater so large that it affected more than 600 people and resulted in a $330 million settlement against Pacific Gas & Electric Co. Masry spent about $10 million on the case and nearly went broke before calling in two larger law firms to partner in the lawsuit. Ultimately, the battle he waged along with his researcher, Erin Brockovich, against Pacific Gas & Electric became the subject of a major motion picture and Masry became a household name among fans of the film. During his 40-year career, Masry has worked on first-degree murder trials, liability suits and stock fraud cases. In the early 1990s, he was a defense lawyer in a $1.5 billion money-laundering case involving businesses in L.A.’s downtown jewelry district known as Operation Polar Cap. The 12 attorneys who work at Westlake Village-based Masry & Vititoe still handle a diverse caseload. But with the attention generated by the PG & E; case, the firm has also developed a reputation as a specialist in pollution issues. Masry is currently representing a group of environmentalists in a suit against oil companies. And he is also defending Save Open Space against a lawsuit filed by Washington Mutual Inc., developer of the huge Ahmanson Ranch housing project. Now, concerned that developers are burying the Conejo Valley in asphalt, Masry is aiming for a seat on the Thousand Oaks City Council. Question: How has the PG & E; case changed your practice? Answer: We are currently handling maybe a total of 100 cases. Before, we had many more cases. They were not of the magnitude that we have now. Of the top 16 largest law firms in California, we are engaged in litigation against 15 of them. So we go up against the biggest law firms in the state continually. And for a firm of our size, that’s unusual. And we regularly beat the hell out of them, so I’m very proud. Q: What are some of the cases you are handling now? A: We have the biggest toxic case in California. We are representing a nonprofit corporation called Communities for a Better Environment and Nicole McAdam, an environmental activist, against the 14 largest oil companies in California, to force them to clean up the water and pay penalties for violating Proposition 65. The oil companies have polluted drinking water, and the object of our lawsuit is to force them to clean up the aquifers. We represent Pamela and Tommy Lee in litigation that involves copyright infringement and unfair trade practices. They filed against distributors we believe are illegally marketing videos in which they’re portrayed. Q: You also recently took on a case defending the right of Save Open Space, which is fighting the Ahmanson Ranch development, to use www.ahmanson.org and similar domain names. Why did you take on that case? A: Because I felt, No. 1, Washington Mutual was wrong, and No. 2, they were using bullying tactics against a group of sincere, hard-working environmentalists who were trying to save a really wonderful area of California which we can never replace. So when Washington Mutual threatened to sue them in typical saber-rattling fashion, we jumped in. Q: How did you first get involved in the lawsuit against PG & E; in Hinkley? A: My partner Jimmy Vititoe’s wife, Karen, called me and said there’s a woman up in Barstow who was her sister’s best friend and was having problems with the sale of her home. Pacific Gas had bought out everybody but her, and she had five acres in the middle of what ended up being a toxic plume, and they had actually offered her more than what her property was worth. But she really didn’t want to move and so she asked me if I would try to obtain more money for her. I had no intention of getting involved in a property litigation matter in Hinkley. The case became a kind of quicksand, getting bigger and bigger. My wife and I kept pouring more and more money into it until, in effect, it exhausted our life savings. We put trust deeds on our home and we actually sold our retirement home in Rancho Mirage to keep the case going. Q: Did the PG & E; case turn you into an avid environmentalist or did you start out feeling that way? A: I’d say I was a warm environmentalist. And I’d say that I’m a hot environmentalist now, but I don’t think I’m avid. I don’t necessarily think that saving the “koochee fly” is worth taking thousands of acres away or depriving an owner of the use of property without compensation. Q: What was your reaction when the movie “Erin Brockovich” was first proposed? A: I was very reluctant to put this in the hands of Hollywood, but I really trusted (producers) Jersey Films and I really liked (Jersey’s executive producer) Michael Shamberg. So I signed. Q: How did you feel about the way the movie turned out? A: My wife and I discussed in depth whether or not we wanted it revealed that we had risked everything on a case. People might look at that and say, “Look at that stupid lawyer. How could you be so dumb at 60 years old to risk your life savings on a case?” So I was concerned about that impression. But at the same time, I was also concerned that the public understand what contingency fee lawyers go through all the time. We risk our assets, our health, our future on a case, and we may lose. And if we had lost, I would have nothing after 60 years of hard work. So we decided to tell it the way it was in the hope that this would help teach the people who watch the movie the importance of contingency fee lawyers. Because without a contingency fee lawyer, believe me, PG & E; would never have happened. Q: The film portrayed Erin Brockovich as the real driver behind the case. How instrumental was she? A: I probably wouldn’t have gotten as heavily involved in the case without Erin. I do know that Erin laid the foundation for the case. Tom (Girardi of Girardi and Keese) and Walter (Lack of Engstrom, Lipscomb & Lack) put up the walls. Q: How realistic is it to think that your firm or others could give cases like PG & E; the same degree of attention it took to win that settlement? A: The PG & E; case would have been lost without the law firms of Tom and Walter coming on board, because PG & E; exhausted me. I’d been in it for approximately two years. I couldn’t go no more. They could throw so many attorneys and experts at you. Motions, every day there was another wheelbarrow full. I had a 42-person law office when I started PG & E; and I would say that within a very few months I had a minimum of 25 of my employees basically full-time on the case and (the firm) not pulling in any income. So the income dropped like a rock and the expenses accelerated like a rocket. Q: What lesson did you learn from PG & E;? A: It seems like the bigger they are, the stupider they are. If they had in 1963 told the neighbors what was going on, none of this would have happened. They would have cleaned it up, everyone would have been happy, gone on with life. Instead of doing that, they hid it. Q: Why do you think they reacted that way? A: To save money. They wanted the bottom line. They were trying to get the stock up. Q: Why did you decide to run for Thousand Oaks City Council? A: We moved to the Valley in the ’40s. We had a 20-acre ranch in Van Nuys, and developers came in and destroyed (Van Nuys). You have no idea how beautiful it was. Look at it now. We moved out here (to the Thousand Oaks area) four years ago, and I saw the same thing starting to happen. We’ve got a majority of the Thousand Oaks City Council controlled by developers. They got most of their money from developers. They vote for the developers. They waive standards. I just decided I’ve had enough. I have seven grandkids who are all living in this area. I want them to have the open space, to be able to look at horses and see animals instead of nothing but asphalt.

A year into an aggressive stock buyback program aimed at boosting its share price, Valencia-based mega-developer Newhall Land & Farming Co. has hit a series of stumbling blocks that have slowed down the repurchase plan and further sunk its stock. Trouble began in late August when the planned sale of the Newhall-owned Valencia Town Center regional mall collapsed after Edwards Theatres, which runs two cinemas in the mall, filed for bankruptcy. Money from the mall sale was to be used for the stock buyback program. A week later, Newhall officials announced they would pull out of a planned Palmdale development, City Ranch, they had partnered on with homebuilder Kaufman & Broad Home Corp. last year. Newhall stock is now trading around $25, down from its 52-week high of $28.88 reached Aug. 14. Two analysts polled by Zacks Investment Research rate the stock a moderate buy. That is a change from August, when analysts split, one rating the company a strong buy, one a moderate buy. “The company is going through some changes,” said analyst Katherine Flores of Sutro & Co. “Over the last year, they’ve focused on building out Valencia and their buyback program.” The rising debt and pullout of Palmdale led Sutro & Co. to downgrade Newhall from buy to accumulate, Flores said. She believes the company will eventually find a buyer for the mall and other assets to pay down its debt, but is concerned that in the short term the failed sale will hurt the company’s profits. Newhall has had a solid performance record through much of the 1990s, with a five-year revenue growth rate of 19 percent. But as it begins to run out of land to develop, earnings have slowed. For the second quarter ended June 30, the company reported net income of $6.3 million (22 cents per share), compared with net income of $12.7 million (40 cents) for the like period a year ago. Revenues were $55.3 million vs. $63.9 million. Flores said the company should have put more thought into its decision to enter the Palmdale market, where home values have languished even as they have exploded in other parts of L.A. County. “It’s disappointing because they just entered it a year ago,” she said. “Anytime someone pulls out of a project after a year, it’s disappointing.” Thomas Lee, CEO of Newhall, said his company initiated talks to withdraw from the project, and Kaufman & Broad has indicated the same. The company is still negotiating with Kaufman & Broad to get out of the partnership. Lee said the mall setback is unrelated to the pullout. “We are still in negotiations and it’s not appropriate for me to comment,” Lee said. “This is not a reflection on the Antelope Valley. It’s a great market and eventually will do fine. Right now, we’re refocusing on Valencia.” Holding pattern for stock The company has embarked on an effort to sell off some of its top properties in Valencia, including the Town Center Mall and commercial properties nearby that house Princess Cruises and other companies. Money from the sales would be used to fund the stock buyback program, apparently because company officials continue to believe that their stock is undervalued. Newhall’s stock has remained stuck in the $20 to $30 range while other real estate stocks rebounded over the last year, thanks to a revived Southern California market. Flores said Newhall’s stock has struggled partly because the company doesn’t have a large number of shares in circulation, deterring larger investors. And because the company is a limited partnership rather than a corporation, it falls under different tax rules, further deterring investors. The aggressive repurchase program called for Newhall to buy back 6.3 million units of stock by the end of 2000. So far, the company has bought 4.65 million units at a cost of $123.5 million. The buyback combined with setbacks in the sale of its real estate offerings have increased the company’s debt, which has gone from $222 million at the end of 1999 to $291 million in the second quarter. The company has financed the stock buyback by borrowing money and selling off various parcels. Lee said the mall setback will delay the repurchase program. It’s too early to say how much of a delay it will cause, he said, but the buyback likely won’t be complete until sometime in 2001. The company is in talks with other potential mall buyers. “We’re committed to completing the unit repurchase and getting it done as soon as we can,” Lee said. Liquidation in the works? Some analysts believe the company is making itself a leaner outfit in anticipation of a sale of the entire operation. By selling off assets, Newhall can make itself more attractive to potential buyers, said Brent Hendrickson, analyst with B. Riley & Co. The company and its assets, which include land for the proposed Newhall Ranch and commercial and residential holdings throughout the Santa Clarita Valley, are too great for one developer to acquire at present. “It makes it easier to sell if they sell off the company (assets),” Hendrickson said. “I think they’re looking at long-term shareholder value.” The sooner the company buys back its stock and increases its market capitalization, the sooner a liquidation or sellout could happen, Hendrickson said. Company officials have declined to say whether a sale is in the works. “That’s very speculative,” Lee said. “We’re not going to comment on that.” And even if the company doesn’t sell itself, Hendrickson said it is making the right moves by focusing on the Valencia market rather than branching out to the Antelope Valley. The Palmdale market is still years away from the point where it will generate big profits for developers, and Hendrickson said for a company that already has a large number of valuable properties in the Valencia area, the time frame doesn’t make sense. “They have a huge project on their hands just in the Valencia area,” Hendrickson said. “They’ve got a lot on their plate now.” The company is still building out Valencia and hasn’t even begun its planned 21,000-home Newhall Ranch, just east of the community on the Ventura County border. “We have a tremendous supply of land,” Lee said. “We anticipate with our existing properties, the company will perform really well in the coming years.”

One of the superior talents of politicians is their capacity for giving away money that does not exist. In this, Al Gore and George W. Bush clearly qualify, with George W. the more ambitious. George W. has weighed in with a 10-year, $1.3 trillion tax cut offer while Mr. Gore has offered a paltry $500 billion over the same period. In fact, we can’t afford either. You can understand why by examining an important basic document, the “Analysis of the President’s Mid-Session Review of the Budget for Fiscal Year 2001” by the Congressional Budget Office. Alternatively, you can think of this column as your Cliff’s Notes. For several decades now, our government has used a “unified” budget concept in which the ongoing operations of government (the “on-budget”) are combined with Social Security and a number of other trust funds (the “off-budget”) to make a single monster budget. When you examine projections for that budget, both the administration and the Congressional Budget Office review of the same budget are pretty close, if you cut them a little slack for looking ahead 10 years. The administration projects revenues of $25,256 billion, outlays of $21,844 billion, and a total surplus of $3,412 billion over the next 10 years. The CBO estimates $25,508 billion in revenue (a $252 billion increase) and $21,761 billion in expenditures (an $83 billion decrease). Put the higher revenue and lower expenses together and the CBO shows a surplus that is $335 billion higher than the administration figure. This is an important clue. Without any radical assumption changes, the two institutions are $335 billion apart, and there is either $549 billion of on-budget surplus or there is $849 billion of on-budget surplus, a difference of $300 billion. At best, Al Gore is committing the entire on-budget surplus, give or take a tiny margin of error. George W. Bush is spending a paycheck that isn’t scheduled to arrive. The Congressional Budget Office, however, has its own budget with 10-year projections. Its budget shows an on-budget surplus of $2,173 billion over the period. That’s more than enough to cover the Bush tax cuts. Whether the projected surplus is $549 billion, $839 billion or $2,173 billion, all of it could be an illusion. If the current federal surplus appeared in a few years, it can disappear even faster. Less than one election ago the Congressional Budget Office was projecting annual deficits to 2007 and beyond. Worse, the deficits grew every year, rising from $171 billion for 2000 to $278 billion for 2007. The difference between the deficits the CBO projected in January 1997 and the surpluses projected in September 2000 starts at $403 billion for fiscal 2000 and rises to $793 billion for fiscal 2007. Over the eight-year period, the total difference between the two sets of projections is a whopping $4,657 billion. The surplus could be “easy come, easy go.” Now let’s talk about where real money is, the off-budget or Social Security surplus. This surplus was created quite deliberately nearly 20 years ago by increasing employment tax rates to start building a Social Security trust fund “cushion.” The idea was to smooth the future retirement of baby boomers. In every year since 1982, our government has spent the growing Social Security surplus, filling the Social Security trust fund with IOUs from the Treasury Department. As a consequence, the Treasury didn’t have to borrow as much from foreigners, institutions and individuals because it had billions from the off-budget surplus to finance the on-budget deficit. In 1998 the unified budget had a surplus for the first time since 1969. Why? The Social Security surplus was larger than the on-budget deficit. This year, both the on-budget and the off-budget are in surplus. Even so, the off-budget surplus, at $172 billion for fiscal 2000, is more than four times larger than the on-budget surplus. The easy, and appropriate, thing to do is to use the off-budget (read Social Security) surplus to replace publicly held Treasury debt, driving it down to zero. This will have the effect of creating a future line of credit to borrow against when the baby boomers retire and Social Security starts to redeem the IOUs it holds. But what about cutting income taxes? “Fugeddaboudit.” Dividing the wealth Question: In a recent column you wrote about a man having $600,000 and dividing it up with $200,000 in a life annuity, and $200,000 in bonds, and the last $200,000 in equities. I think he would have been much better served by placing $200,000 in equities and putting the remainder, $400,000, into a money market or an interest-bearing account at a bank. In the same newspaper there was an advertisement soliciting money market investors to invest at 7.75 percent for three years, 7.5 percent for two years and 6.17 percent for one year. To me, the main problem in purchasing an annuity is that you lose control of your money in the distribution phase. If I were an investment counselor, I would have to recommend to my clients that they be smart enough to control their own money, rather than give it to an insurance company. The insurance company will eventually get the total $200,000 mentioned above. The client would be much better served at his death by giving his beneficiaries the remaining cash, than by leaving it to the insurance company. I could never find any advantage to the 10- and 20-year certain benefit offered by the insurance companies. The annuity costs certainly exceed the benefits. To me the annuity is a guaranteed loss. C.D., Bandera, Texas Answer: Generally, I am reluctant to suggest life annuities for precisely the reasons you mention loss of control and loss of principal. Part of the loss you fear, however, can be illusory because of the time value of money if you purchase your life annuity carefully. Let me explain. In a bond we receive the vast majority of the value of the bond in interest coupons long before we get our original principal back. The present value of the original principal of a $1,000 bond at 6 percent for 36 years, for instance, is only $125. The remainder is the value of the interest coupons over the 36 years. When we annuitize principal, we get a higher monthly payment at the cost of giving up the principal at the end. The present value of life annuity may repeat MAY be higher than the present value of, say, a 30-year bond earning 6 percent. It all depends on how long the annuitant lives and the payment provided by the insurance company. Questions about personal finance and investments may be sent to Scott Burns, The Dallas Morning News, P.O. Box 655237, Dallas, TX 75265, or by fax (214) 977-8776; or by e-mail: [email protected]. Check the Web site: www.scottburns.com. Questions of general interest will be answered in future columns.

For most businesses, large and small, a real estate lease represents a major commitment. It is a commitment that goes beyond the financial outlay: it circumscribes the location of the business, the expansion opportunities, the operating environment, and other matters. Accordingly, the preparation of a real estate lease is not a matter to be entrusted to, and negotiated by, a lawyer. The business manager or owner should make the relevant decisions about the lease. Once those decisions have been made, then a lawyer can serve as a mechanic to put them on paper. Or the competent business man can do it himself and then have the lawyer check it over for the fine details of real estate law. The most important thing about a lease is to make sure that all relevant conditions are spelled out in plain unambiguous language. Usually the landlord will propose a form of lease that provides the prospective lessee with a starting point. But before entering into the lease, there are a number of matters that should be considered. The Term of the Lease This represents a dilemma for both the landlord and the lessee. If the lease is for a short period, the lessee may soon be faced with a decision on the desirability of moving,or that decision may be forced upon him. If the period is inflationary, the lessee will want as long a term as possible without an increase in rent. Vice versa for the lessor. The term desired by the business manager will depend upon a great many factors, including whether and under what circumstances the lease can be renewed or extended. Usually, commercial leases are for terms of three to ten years, but provisions for renewal options may extend for longer periods. The term of the lease is defined by stating precisely when the lease starts and when it ends. However, the starting time is not always so simple. Suppose the premises under consideration are already occupied and the current tenant is scheduled to vacate before the starting date of the lease. If the tenant refuses to move, what then? The lease should state clearly what happens if the premises are not ready for occupancy by the starting date. This matter can be critical if you are under a deadline to move from your present premises. If premises are to be completed or remodeled prior to the starting date, delays in construction, even those beyond the control of the owner, can cause major difficulties. These contingencies should be considered in advance and the lease worded accordingly. If there is any doubt about the actual starting date of the lease, provide some leeway in your own schedule: it may be difficult to operate your business from a moving van. The Right to Renew If a term lease carries no option to renew or extend the lease, the tenant has no rights over any other prospective tenant and will certainly have to pay the going rate for a renewal. Options of renewal are usually at an increased rate. If the renewal price proves to be significantly above the market, negotiations with the landlord are in order. The lease may provide for the exercise of the option in different ways. For example, the lease may provide that the tenant must give notice six months or a year in advance in order to exercise the option. If the tenant “forgets” to give such notice, the lease expires. Or the lease may be extended automatically in the absence of advance notice by the tenant. This may be the better arrangement if your docketing system is not reliable. The Rented Space and its Cost Commercial leases are most often priced by the square foot of leased space. That may seem like a simple and straightforward procedure: just measure the space and that is it. Not necessarily. There are a number of different ways that leased space is measured, so be sure your lease specifies exactly how the square footage is to be computed. It is usual to measure commercial space on the basis of the outside measurements of the building. This may result in including a number of square feet in the rent computation that in fact will be unavailable to you. Moreover, in multiple-tenant buildings, the “public” areas of the building are usually apportioned among the tenants. The space that is provided for use by all tenants or by customers or clients of the tenants may include lobbies, hallways, elevator shafts, janitor rooms, rooms for heating and air-conditioning equipment, and stairways, etc. Be sure you know just how much space you are getting for your own use. Don’t be surprised if 20% to 30% of the space you are being charged for is apportioned as public space. There are a number of so-called “standard” methods of allocating the public space in multi-floor buildings. The “Boston Method” apportions charges for the lobbies and hallways on each floor, but not the bathrooms, elevators shafts, and mechanical rooms. The “New York Multiple Tenancy Floor Method” apportions the space taken by bathrooms and lobbies among the tenants on each floor, but excludes elevator shafts and stairways. The “BOMA International Method” apportions all of the public areas on multiple-tenant floors to the building as a whole and then apportions the space among the tenants. In order to compare rents among different buildings, it is necessary to know precisely how the square footage is to be computed. The cost of a commercial lease can be deceptive because of hidden costs and escalation formulas. Before you can compare the relative costs of different premises, it is necessary to understand fully just how the rent is to be calculated. The first step is to determine what charges are to be added to the base rent. There are a number of widely used kinds of leases. A Gross lease requires only that the tenant pay a fixed charge and the landlord is responsible for building maintenance, taxes, insurance, and operating expenses. Your are unlikely to find commercial space with such a lease. Even under a Gross lease, there may be an add-on charge for electricity and heat depending upon the tenant’s usage or requirements. Net leases require the tenant to pay all or a portion of the real estate taxes. If the building is a single-tenant building, the tenant usually pays all of the real estate taxes. In multi-tenant buildings, the taxes are usually prorated on the basis of square feet. A Net Net lease includes all of the charges of a Net lease plus a charge for insurance on the building. This cost can vary considerably depending upon the breadth of coverage of the insurance. Before agreeing to such a provision, the particular insurance coverage should be specified. A Net Net Net lease is most common when an entire building is occupied by a single tenant. Under such a triple-net lease, the tenant pays all of the costs of the building including maintenance, repairs, grounds upkeep, snow removal, and the like. An annual rental of $10 per square foot may cost $10 per square foot,or it may cost $15, ore more, per square foot. Retail outlets in shopping malls usually pay a base rent plus a percentage of gross revenues. This surcharge takes care of the mall upkeep, parking facilities, security protection, etc. The Right to Sublease The longer the term of the lease, the more important it is to have some right to sublease. The inherent uncertainties of business make it impossible to accurately forecast the needs of a business some years into the future. The right to sublease offers some comfort in the event of an unforeseen turn of events,either good or bad. A right to sublease is usually restricted at least to the extent of requiring the consent of the landlord. This restriction is not objectionable if it includes the caveat that the permission will not be unreasonably withheld. Even then, there can be disputes over what is “reasonable.” The subtenant must meet the same standards as the other tenants in the building and must accept all the restrictions included in the original lease. If you occupy high-tech space in a research-oriented building, the landlord would be within his right to object to a sublease to a heavy machinery fabrication company. If the property is subleased, the original tenant usually remains responsible for the lease payments. If the new tenant defaults, the original tenant will be liable for the rents. The landlord is not likely to negotiate this position away. However, that raises the question of who keeps the gain if the new tenant pays a higher price than called for in the original lease. If your lease contains no right to sublease, you will need to be sure that the corporate entity holding the lease is not changed. For example, what if the tenant corporation merges with another corporation? If the surviving corporation is the tenant, there is not likely to be a problem. But if the other corporation is the survivor, it may have no right to the leased premises. Dane Shields is a Paralegal and freelance writer.