City of Los Angeles building and safety codes and zoning/land-use restrictions are necessarily some of the most stringent in the nation. They protect the life and safety of our citizens and the integrity of our neighborhoods.
But when small-business owners buy an existing office or store location, they should be careful not to unknowingly inherit conditional-use permits, variances, and safety or zoning restrictions.
Such a misstep can be a financial disaster. Some business owners have had the misfortune of learning, after purchasing property, that certain city restrictions exist that severely hamper or even prevent them from conducting their business.
For example, an existing restaurant is purchased and the new owner intends to immediately expand its size. When he submits his expansion plans, the city discovers that the restaurant has not been in compliance with city codes.
The city immediately issues an order to comply and, in this extreme case, shuts down the restaurant until the new owner brings the facility up to code (at considerable cost). In addition, the new owner later learns that his expansion plans are rejected because the location does not meet requirements for off-site parking to accommodate additional restaurant guests.
In another example, an individual buys an existing printing business in an office park and later finds the firm was operating on a conditional-use permit at the location because of a zoning change. The permit states that the printer could operate for only a certain time period, which is set to expire shortly.
The new owner now finds that he has paid an inflated price for an essentially worthless location and must go through a costly and time-consuming process to hopefully obtain an extension of the conditional-use permit.
These examples are real. But small-business owners can eliminate these kinds of threatening surprises if they take the proper steps before the close of escrow on a business property.
When considering such a purchase, buyers should first contact the office of their local city council member and arrange to speak to the person responsible for land-use planning or small-business issues.
The council office can determine whether general zoning or land-use problems exist on the property. In addition, officials can tell small-business owners whether any negative social issues exist concerning the proposed type of operation. An example would be a new liquor store in a location where residents believe there are already too many liquor stores.
Council offices want to be kept informed about what’s happening in their community and will appreciate small-business owners giving them a heads-up on their proposal no matter how small the business.
The goodwill created will go a long way if the business owner later seeks approval of improvements or changes to the operation.
As part of a purchase agreement and escrow, property buyers should require that a building-and-safety inspection be conducted. The sale could then be conditioned on a satisfactory result.
Unfortunately, city inspectors are too busy to undertake these types of “preemptive” inspections. But retired building officials or qualified private individuals are available to carry out detailed inspections to ensure that the property meets codes and to provide the potential buyer with a written inspection report. The price of the inspection (typically several hundred dollars) is well worth the cost.
To further safeguard their investment, small-business owners should consider retaining a lawyer or land-use expert for the limited purpose of determining the conditions under which the existing business is operating.
The expert can answer many key questions: Is the business in a properly zoned area? Has there been a zone change since the business began operating that will prevent new owners from expanding? Is the business operating under a conditional-use permit or variance that says under certain conditions the business can operate for only a fixed time period or in a certain manner?
When a conditional-use permit or variance on a property is uncovered, the buyer can attempt to extend the term with the city. With a costly extension, the buyer can usually dramatically reduce the purchase price of the business.
For example, if the business has two years left on its conditional-use permit or variance, the buyer should only pay for the business based on two years of income instead of a lifetime of income. The business may actually be worth nothing if selling it would be impossible once the conditional-use permit or variance expires.
Names of experienced inspectors and land-use experts in the Los Angeles area can be obtained by calling the appropriate city department, consulting with the local bar association, or by asking the council member’s office.
When purchasing an existing business, buyers are often diligent about examining the physical structure for defects and considering the visibility and marketability of the location. Reviewing city codes and other restrictions should also become a part of this due diligence process.
Lee Kanon Alpert is the founding principal of the Encino law firm of Alpert & Barr and a past-president of the Building and Safety Commission for the city of Los Angeles. He can be reached at LKA@aol.com .
Entrepreneur’s Notebook is a regular column contributed by EC2, The Annenberg Incubator Project, a center for multimedia and electronic communications at the University of Southern California. Contact James Klein at (213) 743-1759 with feedback and topic suggestions.