Real Estate 2026 Comparisons

California real estate law is shaped by a combination of state statutes, local regulations and judicial decisions. The principal state-law sources include: the California Civil Code, which governs many property, ownership and contract issues; the Code of Civil Procedure, which addresses matters such as foreclosure and unlawful detainer proceedings; and the Government Code and Public Resources Code, which play significant roles in land use, planning and environmental regulation. Tax matters affecting real estate ownership and transfers are addressed primarily through the Revenue and Taxation Code.

The economic activity driven by the AI revolution has revitalised the Bay Area office market, particularly in San Francisco and parts of Silicon Valley, where AI and large-language-model companies have absorbed significant space and driven a notable recovery in leasing demand and tenant competition for high-quality, well-located buildings. Demand has been concentrated in trophy and amenity-rich assets, while commodity and older office stock continues to face elevated vacancy, concessions and downward pressure on values. Office demand in Los Angeles and San Diego is still lagging, though improving, with recovery proceeding more slowly than in the Bay Area.

Life sciences and lab activity has been low for several years, following the post-pandemic correction, a pullback in venture and biotech funding and a wave of new lab supply delivered into a softening market. Many participants are hopeful there will be an uptick in activity in the coming 12 months as funding conditions stabilise, but vacancy in key clusters (such as south San Francisco and San Diego) remains elevated.

Industrial, logistics, data centre and digital infrastructure assets have continued to attract the strongest investor demand, supported by artificial intelligence, cloud computing and related technologies. Power availability, utility timing and upgrade costs and infrastructure capacity have become material factors in site selection and valuation.

Deal activity in California over the past 12 months has remained below historical peaks but has improved as buyers and sellers have narrowed pricing gaps. In the office sector, notable activity has been concentrated in two areas: acquisitions of high-quality, well-located assets, and opportunistic or distressed purchases of commodity office space, including assets transferred through receivership, lender-driven resolutions or other distressed processes. Recapitalisations, joint ventures and refinancings involving private credit and other alternative capital sources have also featured prominently.

The California market over the past 12 months has been shaped primarily by elevated borrowing costs, tighter underwriting standards and continued uncertainty regarding the timing and pace of interest rate reductions. Higher capital costs have compressed valuations in several asset classes, slowed transaction volumes relative to historical peaks and placed pressure on assets facing near-term loan maturities.

Lenders and borrowers have engaged in loan modifications, extensions, restructurings and other workout arrangements as loans mature in a higher-rate environment. Following the pandemic and the subsequent period of elevated rates, many lenders initially favoured forbearance and negotiated resolutions over immediate enforcement, but the market has seen a growing number of restructurings, foreclosures, receiverships and lender-driven resolutions involving challenged office and other transitional assets, along with distressed transfers of ownership. At the same time, market participants have increasingly seen situations in which underperforming assets have transferred to lender control, entered receivership or changed ownership through distressed transactions.

California does not currently have a single pending reform that would significantly reshape all real estate investment, ownership or development.

In California, the principal property rights that can be acquired include fee simple ownership, leasehold interests and a range of non-possessory rights such as easements, licences and profits. Fee simple is the broadest ownership interest and the form most commonly acquired in commercial purchase transactions. Leasehold interests may be short-term or long-term and can themselves have substantial value, particularly in ground lease, build-to-suit, hotel, retail and infrastructure-related transactions.

Transfers of title to real estate in California are governed primarily by state property, contract and recording law. The Civil Code sets out rules on conveyancing, deed formalities and certain title principles, while county recording systems determine how deeds and other instruments are made part of the public record. Purchase and sale agreements are also shaped by general contract law, agency principles and fraud and disclosure rules.

A lawful transfer of title to real estate in California is usually effected by delivery and acceptance of a properly executed deed, most commonly a grant deed or quitclaim deed depending on the nature of the transaction. In commercial deals, the deed is delivered through an escrow process administered by a title company or escrow holder, with closing conditioned on satisfaction of the purchase agreement, payoff of existing liens where required and recordation of closing documents. Parties then obtain typical title insurance policies and endorsements, as California uses an abstract title system.

Real estate due diligence in California is typically carried out through a combination of legal, title, physical, environmental, financial and operational review during a negotiated diligence period purchase agreement. The scope depends on the asset class and business plan, but buyers usually begin with title and survey review, lease and contract analysis, zoning and land use review, environmental reports and a physical assessment of the property and its systems, generally with the assistance of third-party diligence consultants. Endorsements and title coverages are then negotiated with the title company.

In California, commercial real estate transactions, seller representations and warranties are typically limited and heavily negotiated. They commonly cover:

• the seller’s authority and due authorisation;
• enforceability;
• non-foreign status for federal tax purposes;
• absence of pending seller bankruptcy;
• litigation affecting the seller or property;
• existing service contracts;
• lease schedules;
• rent rolls;
• notices of default; and
• the seller’s knowledge of certain environmental, condemnation or compliance matters.

The exact package varies significantly with the asset type, deal size and whether the property is being sold by an institutional seller, owner-operator, lender or special situation seller.

When acquiring real estate in California, investors typically evaluate a range of legal, regulatory and operational considerations, in addition to the purchase price and title condition. The relative importance of each issue depends on the asset type, business plan and ownership structure. Key areas of review commonly include:

• title and survey matters;
• zoning and land use compliance;
• environmental conditions and liability;
• leasing and occupancy issues;
• property and transfer tax considerations;
• financing restrictions and lender requirements;
• entity structuring considerations; and
• recorded agreements affecting access, utilities, parking, operations or future development.

For development and transitional assets, investors also focus heavily on permitting requirements, infrastructure availability, construction risks and regulatory approvals that may affect project timing and costs.

A buyer of real estate in California can face liability for soil pollution or environmental contamination, even if the buyer did not cause it. Potential liability can arise under both federal and state environmental laws, particularly where the buyer becomes the current owner of contaminated property or disturbs existing contamination through redevelopment or operations. The approach to due diligence follows the typical Phase I/Phase II Environmental Site Assessment ("ESA") process, though California laws may involve additional obligations, slow development and diligence timelines, or make certain acquisitions or proposed developments entirely untenable.

A buyer typically ascertains the permitted uses of a California property through a combination of zoning review, local planning and building department inquiries, title review and project-specific land use analysis. That review normally includes the applicable general plan designation, zoning district, overlay zones, specific plans, conditional use permit requirements, parking rules, height and density limits and design controls, as well as any recorded restrictions such as covenants, conditions and restrictions ("CC&Rs"), reciprocal easement agreements or development conditions.

For improved property, buyers also review existing permits, certificates of occupancy or similar approvals, non-conforming use status and code compliance history. California real estate buyers typically engage permitting or land use counsel specifically for these purposes.

Governmental taking of land is possible in California through the power of eminent domain. Public entities may acquire private property for a public use, subject to constitutional and statutory requirements, including the payment of just compensation. Typical public uses include transportation, utilities, schools, public facilities and certain infrastructure or redevelopment-related purposes authorised by law.

California does not impose a statewide stamp duty on real estate transfers in the way some jurisdictions do, but real estate transactions may trigger county documentary transfer taxes, and, in some cities, additional municipal transfer taxes. In practice, the purchase agreement determines how transfer taxes and other closing costs are allocated between buyer and seller, though it is common for the seller to bear at least the transfer tax unless market conditions or local custom dictate otherwise.

California Revenue and Taxation Code Section 60 et seq governs property tax reassessments upon a “change in ownership”, which is broadly defined and may include transfers of direct or indirect ownership interests, as well as certain lease transactions, including leases with terms of 35 years or more. California’s property tax regime is complex and includes the continuing effects of Proposition 13, Proposition 8 and related reassessment rules. As a result, property tax reassessment issues are frequently a significant component of transaction negotiations, and purchase agreements commonly contain provisions addressing the allocation of reassessment risk, supplemental tax bills and related tax consequences.

California generally does not prohibit foreign investors from acquiring commercial real estate solely because they are foreign. Foreign individuals and entities routinely invest in California property directly or through US and non-US holding structures. However, foreign investors remain subject to the same state law rules that apply to domestic investors, including property, tax, land use, environmental, lending and entity compliance requirements.

Acquisitions of commercial real estate in California are generally financed with a combination of sponsor equity and mortgage debt. For stabilised assets, the most common structure is a senior secured loan made to the property-owning entity and secured by a deed of trust on the real estate, together with assignments of leases and rents and security interests in related personal property and accounts. Mezzanine financing structures can also be employed to improve the overall cash-on-cash return or increase overall loan to value. Loan terms depend heavily on asset class, tenant profile, debt service coverage, sponsorship strength and the lender’s view of refinancing and exit risk.

A commercial real estate investor borrowing to acquire or develop property in California will typically grant a deed of trust creating a lien on the real estate in favour of a trustee for the benefit of the lender. The lender will also usually take an assignment of leases and rents, a security interest in fixtures, equipment, accounts and other personal property associated with the asset, and a pledge of the equity interests in the borrowing entity where the structure permits (which may be made to a separate, mezzanine lender).

Universal Commercial Code ("UCC") filings are commonly used to perfect security interests in personal property collateral. Secured lenders generally require the borrower’s counsel to give opinions regarding enforceability as to California state-law matters, as well as other customary CA, NY, or DE opinions as to typical authorisation and entity matters, or creation and perfection of security interests. California also has unique and highly consequential anti-deficiency and one-action statutes (among other things) relating to lenders’ risks and remedies, which are frequently addressed in detail in borrower opinion letters.

There is no general California prohibition on granting security over real estate to a foreign lender. Foreign lenders can take a deed of trust and related collateral package much as a domestic lender would, provided the transaction complies with applicable federal and state law.

The key issues are usually regulatory, tax and enforcement-related, rather than a blanket restriction on foreign lending. Foreign lenders may also not be well versed in California’s statutes relating to anti-deficiency, one-action, environmental liability and other potential concerns, and therefore local California counsel involvement on California real estate transactions is generally highly recommended.

California generally does not separate a mortgage recording tax of the type seen in some other US states. However, fees are payable to record a deed of trust, assignment or related instrument in the county land records. Additional documentary, indexing and administrative charges may apply in connection with the filing, amendment, release or reconveyance of recorded documents.

Before an entity grants valid security over its real estate in California, it must have the organisational power and proper internal authorisation to do so. That usually means confirming the borrower’s formation documents, operating agreement, partnership agreement, bylaws or similar governing documents, obtaining the required member, manager, partner or board approvals and ensuring that the transaction does not violate negative covenants, existing financing arrangements or investor restrictions. Opinions of counsel may be required in larger transactions on authority, enforceability and entity status.

When a borrower defaults, the lender’s enforcement path depends heavily on the loan documents, the collateral package and whether the lender elects judicial or non-judicial remedies. In California, deeds of trust are commonly enforced through non-judicial foreclosure, which is generally faster and more predictable than judicial foreclosure, providing the statutory notice requirements and deed of trust terms are satisfied. Lenders may also seek appointment of a receiver, enforce assignments of rents, exercise cash management controls or negotiate a workout rather than foreclose immediately. Some specific concerns are addressed below:

• California’s enforcement regime begins with the “one-action rule”. There can be but one form of action for the recovery of any debt or the enforcement of any right secured by mortgage upon real property or an estate for years therein. A secured lender generally must look to its real property collateral before pursuing the borrower personally, and a creditor that sues on the debt without first exhausting its security risks losing the security or the debt.
• A beneficiary under a California deed of trust may foreclose either judicially or non-judicially. A beneficiary under a deed of trust can foreclose on real property security judicially by suing for a judgement of foreclosure under Sections 725a and 726, or non-judicially by exercising a power of sale under Civil Code Sections 2924 and 2932.
• The choice of foreclosure path has decisive consequences for the lender’s ability to pursue a deficiency (ie, the shortfall between the debt and the value/sale price of the collateral). Under California Civil Code Section 580d, no deficiency shall be owed or collected, and no deficiency judgement shall be rendered, on a note secured by a deed of trust or mortgage on real property where the property has been sold by the mortgagee or trustee under a power of sale. Thus, choosing the faster trustee’s sale route extinguishes any deficiency claim against the borrower. The anti-deficiency statutes protect the borrower/principal obligor, but they do not, by their terms, shield guarantors.
• There are also environmental liability considerations which are discussed in more detail in Section 3.8. Lenders' Liability Under Environmental Laws.

Existing secured debt can become subordinated to newly created debt by agreement, or, in some cases, by the operation of lien priority rules. The most common method is an express subordination agreement or intercreditor agreement, in which the senior and junior creditors set out lien priority, payment priority, cure rights, standstill periods and enforcement mechanics. These arrangements are common where mortgage debt is combined with mezzanine debt, preferred equity, construction financing or refinancing transactions. Other specific risks to lien priority are mechanic’s liens and tax liens.

California mechanics’ liens enjoy a relation-back priority that can prime an earlier-recorded deed of trust: under Civil Code Section 8450, a mechanics’ lien has priority over a lien, mortgage, deed of trust or other encumbrance on the work of improvement or the real property on which the work of improvement is situated, that either attaches after commencement of the work of improvement or was unrecorded at the commencement of the work of improvement and of which the claimant had no notice.

Under Revenue and Taxation Code Section 2192.1, every tax declared to be a lien on real property, and every public improvement assessment declared by law to be a lien on real property, have priority over all other liens on the property, regardless of the time of their creation. Because the property tax lien primes a recorded deed of trust irrespective of recording order, lenders address this risk through tax diligence, impounds/reserves and ongoing monitoring of property tax status and covenants to pay taxes.

Mere status as a secured lender is not automatically enough to create liability, and there are important creditor protections under federal and state law. However, those protections can narrow if the lender takes title to the property, controls operations in a way that goes beyond protecting its collateral or otherwise falls outside the scope of the secured-creditor exemption.

A lender holding or enforcing a California deed of trust can face environmental liability, principally as a current “owner or operator” under CERCLA and analogous state law if it takes title (eg, by foreclosure or deed-in-lieu) or exercises operational control beyond protecting its collateral.

California law addresses this risk through two interlocking statutes that also create important exceptions to the one-action and anti-deficiency rules. Where the collateral is environmentally impaired and the borrower is in default, a secured lender may elect to:

• waive its lien against any environmentally impaired or affected parcel (and related fixtures/personal property) and exercise the rights and remedies of an unsecured creditor, including reducing its claim to judgement; or
• exercise its rights and remedies as a secured creditor.

This lets a lender avoid taking title to (and thus owner/operator liability for) contaminated collateral by “waiving” the lien and suing on the debt directly.

Critically for documentation practice, California expressly authorises a stand-alone recovery on the borrower’s (and guarantor’s) environmental representations, warranties, covenants and indemnities, outside the anti-deficiency and one-action framework. Notwithstanding any other provision of law, a secured lender may bring an action for breach of contract against a borrower for breach of any environmental provision relating to the real property security, for recovery of damages and enforcement of the provision, and that action (or failure to foreclose first against collateral) does not constitute an action within the meaning of Section 726(a), or a deficiency or deficiency judgment within the meaning of Sections 580a, 580b, 580d, or 726(b).

Because the environmental provision is enforceable separately from, and is not treated as, a barred deficiency claim, California secured lenders almost always require a separate, unsecured environmental indemnity agreement from the borrower and any guarantor.

Security interests are not automatically made void solely because the borrower becomes insolvent. A properly created and perfected deed of trust, assignment of rents or other security interest will generally remain valid, subject to bankruptcy law and any defects in creation, perfection or priority. The main effects of insolvency are procedural and practical: bankruptcy can impose an automatic stay, restrict enforcement, require court approval for certain actions and affect the lender’s ability to realise on collateral immediately.

Separate from the priority contests described above, a security interest granted by a borrower that was insolvent when the loan was made, or that was rendered insolvent by it, can be attacked under California’s Uniform Voidable Transactions Act ("UVTA"), Civil Code Section 3439 et seq. The practical risk is concentrated where the lender does not give “reasonably equivalent value” for the lien.

In the same general vein, lenders should be aware of

• federal bankruptcy avoidance powers if the borrower files within the look-back periods;
• constructive and actual fraudulent transfers (which can reach the lien on the same insolvency/reasonably-equivalent-value analysis) and preference risk for liens granted to secure antecedent debt shortly before filing;
• equitable subordination and recharacterisation of insider or controlling-lender debt; and
• alter ego/sham-guaranty challenges, where a purported third-party obligor is treated as the principal obligor (which, as discussed above, can also defeat antideficiency waivers).

California generally does not impose a separate mortgage recording tax on ordinary real estate mortgage loans or mezzanine loans. Recording a deed of trust or related real property security instrument does involve county recording fees and administrative charges, but these are not typically material in the way transfer taxes can be.

Mezzanine loans secured only by equity interests usually involve UCC filing fees, rather than county real property recording charges. California’s transfer-tax statute is the Documentary Transfer Tax Act. It authorises counties and cities to tax conveyances of realty, not the granting or recording of a mortgage or deed of trust.

Land use, development, design and construction in California are governed by a layered system of state law and local regulation. At the state level, the Planning and Zoning Law, Subdivision Map Act, California Environmental Quality Act, building standards adopted through the California Building Standards Code, fire accessibility requirements and a range of environmental, housing and infrastructure statutes all play important roles.

These statewide rules are then implemented through local general plans, zoning ordinances, specific plans design guidelines, subdivision regulations, building codes and permit conditions adopted by cities and counties.

Development rights in California are obtained through the combination of zoning compliance and the project-specific approvals required for the intended use, design and construction. Depending on the site and proposal, this may include:

• parcel maps or tract maps;
• zoning changes;
• variances;
• conditional use permits;
• site plan approval;
• design review;
• environmental review under the California Environmental Quality Act ("CEQA");
• building permits;
• grading permits;
• utility approvals; and
• subdivision-related approvals.

Some qualifying projects benefit from streamlined or by-right pathways, but many commercial and mixed-use developments still require discretionary action by local authorities.

Investors in California commonly hold real estate through limited liability companies ("LLCs"), limited partnerships ("LPs"), corporations, trusts, and, for some institutional structures, Real Estate Investment Trust-related ("REIT-related") vehicles. The most widely used holding vehicle for private commercial real estate is the LLC because it offers liability protection, contractual flexibility and generally favourable tax treatment for pass-through structuring. Limited partnerships are also common, particularly for joint ventures, fund structures and sponsor-investor arrangements where governance and economics are split between a general partner or managing member and passive capital.

Real estate transactions also frequently make use of single-purpose (or special-purpose) entities, most commonly LLCs, formed to hold a single asset and to isolate that asset and its associated liabilities from the sponsor’s other holdings. The use of a Special Purpose Entity ("SPE") is driven in significant part by financing requirements: secured lenders, particularly in Commercial Mortgage-Backed Securities ("CMBS"), agency and other institutional financings, typically condition the loan on the borrower being a “bankruptcy-remote” SPE and require the entity’s organisational documents to contain specific SPE covenants.

These provisions commonly restrict the entity to owning and operating the single property, prohibit it from incurring additional indebtedness or granting other liens. They also require it to maintain separate books, records, accounts and assets and otherwise observe corporate separateness formalities, restrict mergers, dissolution, asset sales and amendments to the governing documents, in addition to often requiring one or more independent managers or members whose consent is needed before the entity may file for bankruptcy.

Lenders frequently require that these SPE covenants be drafted so that the secured lender is an express third party beneficiary of the relevant provisions of the operating agreement, and that the covenants cannot be amended or waived without the lender’s consent. This is so the lender can enforce the separateness and bankruptcy-remoteness protections directly, even though it is not a party to the operating agreement.

LLCs are the most commonly used entities for holding commercial real estate in California. An LLC is formed by filing organisational documents with the California Secretary of State and is governed principally by an operating agreement. Operating agreements can be highly customised to address management authority, transfer rights, distributions, capital contributions, approval thresholds and exit mechanics. For tax purposes, LLCs are generally treated as pass-through entities, unless they elect corporate taxation, which allows income, gains and losses to flow directly to the owners.

LPs are frequently used for joint ventures, investment funds and sponsor-investor structures. An LP is governed by a partnership agreement that typically allocates management authority to the general partner, while providing limited partners with economic rights and certain approval rights. Like LLCs, LPs are generally treated as pass-through entities for tax purposes, making them attractive for many real estate investment structures.

Corporations are governed by articles of incorporation, bylaws and applicable corporate law. They generally provide a more formal governance structure involving directors, officers and shareholders. Although corporations can offer certain organisational and capital-raising advantages, they are used less frequently for private real estate ownership because corporate earnings may be subject to taxation at both the entity and shareholder levels, unless a special tax regime applies, and because the corporate form offers less flexibility to allocate distributions disproportionately among owners. Dividends are generally paid ratably among shares of the same class, making it harder to implement the preferred returns, distribution waterfalls and sponsor promote structures common in real estate joint ventures, which LLCs and limited partnerships accommodate more readily.

Trusts are sometimes used for estate planning, succession planning and asset-holding purposes, while institutional investors may utilise REITs and other specialised ownership structures. The selection of an entity is typically driven by tax considerations, liability protection, governance requirements, financing objectives and the nature of the investor group involved in the transaction.

REITs are a commonly available investment vehicle in the United States and are regularly used for real estate ownership, including California assets. Both public and private REIT structures exist, and foreign investors can generally invest in them, though they have tax, withholding and specific structuring issues that need careful review. A REIT is not usually the default structure for a single middle-market acquisition, but it is important for larger portfolios, institutional platforms and capital markets-oriented ownership.

California generally does not impose a meaningful minimum capital requirement to form the private entities most commonly used to hold real estate, such as LLCs, LPs and corporations. In principle, these entities can usually be formed with nominal initial capital. In practice, however, the amount of capital required is driven by business needs, lender requirements, solvency considerations and negotiated investor arrangements, rather than by entity formation law.

In practice, governance provisions are often heavily negotiated in commercial real estate transactions, particularly in joint ventures and investment structures involving multiple investors. Approval rights, transfer restrictions, capital call provisions, deadlock mechanisms and exit rights frequently receive significant attention because they can affect both day-to-day operations and long-term investment objectives.

Although the Corporate Transparency Act ("CTA") remains relevant in certain circumstances, particularly with respect to some foreign entities registered to do business in the United States, the reporting requirements applicable to many privately held real estate investment vehicles have been significantly reduced. Because the regulatory landscape continues to evolve, investors, sponsors and entity managers should monitor future developments and assess whether any reporting obligations apply to their particular ownership structures.

Annual entity maintenance and accounting compliance costs in California vary widely by entity type, ownership complexity and reporting needs, so there is no single standard figure. For a simple single-asset LLC, routine annual costs may include:

• state filing fees;
• franchise taxes;
• agent costs, if any;
• bookkeeping;
• tax return preparation; and
• basic internal maintenance.

California law recognises several arrangements that allow a person or business to occupy or use real estate for a limited period without acquiring ownership. The principal arrangement is a lease, which grants a possessory interest for a defined term and is the standard structure for commercial occupation. The defining distinction between a lease and a licence is that a lease conveys exclusive possession, whereas a licence confers only personal permission to use the property and does not create an interest in the land.

Subleases, ground leases, licences and easements are also common, depending on the intended use and the degree of control the occupant needs. A licence is ordinarily revocable at will, but the degree of protection can vary: a licence coupled with an interest, or one made irrevocable by its express terms (or by the licensee’s substantial reliance), may afford greater protection.

California commercial leasing uses several lease types, with the principal distinctions turning on how rent is structured, how operating expenses are allocated between landlord and tenant, the asset class involved and how responsibility for tenant improvement and base-building work is divided.

The core categories sit along an expense-allocation spectrum, including gross, modified gross, triple net, absolute net and variations on the foregoing. The drafting required to implement each structure varies widely, and engaging local California counsel is generally advisable, particularly for the operating-expense and pass-through provisions, which carry California-specific complexity.

Property taxes are a leading example: under Proposition 13, real property is generally reassessed to "fair market value" upon a change in ownership, which can produce a substantial mid-lease step-up in taxes following a landlord sale, while Proposition 8 permits temporary downward reassessments when "market value" falls below the Proposition 13 base, affecting the size of pass-through tax obligations from year to year.

Earthquake insurance is another, as premiums and often very large deductibles can be significant and heavily negotiated pass-through items, along with other “big-ticket” costs such as capital expenditures, seismic retrofit or code-compliance obligations that may not be apparent in lease forms drafted for non-California assets.

In California, commercial rents and lease terms are generally freely negotiable rather than tightly regulated. The parties typically determine rent, term, expense allocation, renewal rights, repair obligations, default remedies and most other economic and operational terms by contract. This gives landlords and tenants broad freedom to structure the lease around the asset, market conditions and the tenant’s operational requirements. Certain California statutes provide “default rules” applicable to commercial leases, but these are generally waivable by inclusion of contractual language, and in many cases, these statutes are expressly waived in the lease contracts themselves.

Further, the above assumes the answer concerns commercial leases. Most residential leases are subject to statutory advance-notice requirements (Civil Code Section 827) and a statewide cap on year-over-year rent increases (Civil Code Section 1947.12, generally the lower of 5% plus regional Consumer Price Inflation ("CPI") or 10% over any 12-month period), subject to statutory exemptions and any stricter local rent-control ordinance. Because these limits turn on continued occupancy by the same tenant, rather than on whether the lease is being renewed, they can apply even to an increase imposed on renewals done at "arm’s length".

The typical length of a commercial lease in California depends on the asset class, the tenant’s credit and the amount of landlord or tenant investment in the space. Office and industrial leases commonly run from three to ten years, though shorter and longer terms are both common.

Infrastructure leases, such as solar photovoltaic facilities, often cap their lease term at 34 years, 11 months, and 27 days, to avoid having a term length of 35 years or more, which would trigger a property tax reassessment upon commencement and upon expiration, under California Revenue & Taxation Code Section 60 et seq.

Rent rarely remains fixed for the full term of a California commercial lease. Most commercial leases are drafted to increase rent over time, both to reflect inflation and to capture growth in market value, and the parties are generally free to agree on whatever escalation structure they choose (commercial rent being freely negotiable rather than regulated).

The most common approaches are fixed periodic “bumps” (for example, a set percentage or dollar increase on each anniversary), increases tied to an index such as the CPI, and, in longer leases, periodic resets to "fair market" rent. In net leases, the tenant’s total cost also rises independently of base rent as its share of operating expenses, taxes and insurance increases from year to year.

The method for determining a rent change depends on the escalation mechanism the parties negotiated, and most commercial leases have fixed escalations, index based adjustments or "fair market" resets upon extension terms being exercised.

Commercial rent can, however, attract local business taxes measured by gross receipts, which function economically as a turnover tax on rental income and vary significantly from one jurisdiction to another. The clearest example is San Francisco, which imposes several gross receipts-based taxes on businesses, including taxes that fall on rental income from commercial property:

• a general Gross Receipts Tax is applicable to most business activity, including the business of leasing real property;
• the Early Care and Education Commercial Rents Tax (adopted as Proposition C in June 2018), the “early childhood” measure, imposes an additional tax on gross receipts a landlord receives from leasing commercial space in San Francisco (with a reduced rate for certain warehouse/industrial space), earmarked to fund early care and education; and
• other voter-adopted gross-receipts surcharges (for example, the 2018 Homelessness Gross Receipts Tax and the Overpaid Executive Gross Receipts Tax), which can apply depending on the taxpayer’s activities and size.

Because these taxes are imposed on the landlord (measured by the rent received), landlords commonly respond by drafting the lease to pass the economic burden through to the tenant, for example, by including the tax within “taxes” or “operating expenses” definitions, or via a specific rent-tax/gross-receipts-tax pass-through clause requiring the tenant to reimburse the landlord for any such tax attributable to the rent payable under the lease.

In addition to the first rent payment, commercial tenants are often required to provide a security deposit, letter of credit or other form of security at the commencement of the lease.

Responsibility for maintenance and repair depends largely on the lease structure. In multi-tenant projects, landlords typically maintain and repair common areas, structural components and building systems, while tenants are responsible for maintaining the portions of the premises they exclusively occupy. The costs of maintaining common areas, parking facilities, landscaping and similar shared facilities are frequently recovered from tenants through common area maintenance ("CAM") charges or operating expense reimbursements.

Utilities and telecommunications services may be separately metered or allocated among tenants according to the terms of the lease. Where separate metering exists, tenants typically contract directly with service providers and pay the associated costs. In multi-tenant buildings, certain utility expenses may be included within operating expenses and allocated among tenants based on a negotiated formula, such as rentable square footage or actual usage where available.

Responsibility for property taxes depends on the lease structure. Under triple-net leases, tenants commonly reimburse landlords for all or substantially all property taxes attributable to the leased premises. In gross or modified gross leases, some or all property taxes may be included within the rent, subject to negotiated expense pass-through provisions. Tax allocation provisions are often heavily negotiated in larger commercial leases, particularly where reassessments or special assessments may occur during the lease term.

Landlords generally maintain insurance covering the building and other property interests they retain, while tenants maintain insurance covering their personal property, business operations and liability exposures. Commercial leases typically require tenants to carry commercial general liability insurance, and, depending on the nature of the business, may also require property, workers’ compensation, umbrella liability and business interruption coverage.

The allocation of insurance obligations is usually addressed in detail within the lease, including minimum coverage requirements, additional insured provisions, waiver of subrogation requirements and procedures following casualty events.

Commercial leases commonly restrict how tenants may use the leased premises. Permitted use provisions often define the specific business activities that may be conducted and may prohibit uses that could create legal, operational or reputational risks for the property. Landlords may also restrict activities that conflict with exclusive-use rights granted to other tenants.

In addition to lease restrictions, tenants must comply with applicable zoning, land use, environmental, health and safety laws, as well as any recorded covenants, conditions and restrictions affecting the property.

Tenants are often permitted to make alterations and improvements, subject to the terms of the lease. Significant alterations typically require the landlord’s prior consent, while minor cosmetic work may be permitted without approval.

Lease provisions frequently address construction standards, permitting requirements, contractor qualifications, insurance obligations and ownership of improvements upon lease expiration. Landlords generally seek to ensure that alterations do not impair the value, operation or structural integrity of the property.

While general California leasing principles apply across asset classes, several regimes turn on the type of property or tenant. Residential leases are the most heavily regulated category. They are subject to statewide rent-increase caps and “just cause” eviction requirements under the Tenant Protection Act of 2019 (Civil Code Sections 1947.12 and 1946.2, subject to exemptions), advance notice requirements (Civil Code Section 827), the implied warranty of habitability, security deposit limits and any stricter local rent control or eviction ordinances.

Commercial leases have historically been treated as "arm’s length" contracts with few tenant protective mandates. That changed with the Commercial Tenant Protection Act (SB 1103), effective January 1 2025, which extends certain residential-style protections to a “qualified commercial tenant”, which covers broadly: microenterprises, restaurants with fewer than a specified number of employees and nonprofits.

For qualifying tenants, the Act imposes, among other things, extended notice for terminating periodic tenancies and for certain rent increases (Civil Code Section 1946.1), restrictions and itemisation/notice requirements on the pass-through of building operating costs and a requirement to provide a translated copy of the lease where the lease was negotiated primarily in certain non-English languages (Civil Code Section 1632); its protections cannot be waived. The Act does not reach larger or sophisticated commercial tenants, but it is an important asset-class-by-tenant-class distinction to screen for.

A tenant’s insolvency may affect both the tenant’s occupancy rights and the landlord’s available remedies. If a tenant files for bankruptcy protection, the landlord’s enforcement rights may be subject to an automatic stay and other protections available under applicable bankruptcy laws.

Most commercial leases expressly address holdover: they specify the rent payable if the tenant remains in possession beyond the term (commonly a premium of 125% to 200% of the prior rent), whether the holdover creates a month-to-month tenancy or a tenancy at sufferance and often a tenant indemnity for consequential losses (for example, claims by a succeeding tenant). If the tenant holds over without the landlord’s consent, the landlord may treat the tenant as a holdover and pursue removal; if the landlord accepts holdover rent, a periodic tenancy may arise on the lease terms as modified by the holdover provision.

For ground leases of infrastructure and renewable-energy facilities (for example, solar photovoltaic, battery storage, wind or telecommunications sites), the position at end of term is typically more involved than ordinary surrender. These leases commonly provide for a defined post-term decommissioning period, during which the tenant retains limited access not to continue operations but to remove its improvements and equipment, remediate the site and restore the land to a specified condition.

In California, a commercial tenant may generally assign its leasehold interest or sublet the premises, subject to the terms of the lease. Restrictions on transfer are enforceable, but they are construed in the tenant’s favour, and the parties are otherwise free to negotiate the transfer regime (Civil Code Section 1995.010 et seq). In practice, nearly all commercial leases permit assignment and subletting with the landlord’s prior consent, and it is market for the lease to provide that such consent may not be unreasonably withheld (often with negotiated standards, conditions, recapture rights, profit-sharing on excess rent and carve-outs permitting transfers to affiliates or in connection with a sale of the tenant’s business without consent).

Typical conditions imposed on a permitted transfer include landlord consent (subject to the reasonableness standard), delivery of financial and use information about the proposed transferee, continuing liability of the original tenant, an assumption agreement from the assignee, prohibitions on transfers that violate other tenants’ exclusives, recapture/termination options and sharing of any “profit” (rent in excess of the contract rent).

Landlords are typically entitled to terminate a lease following specified events of default, including non-payment of rent, failure to perform material lease obligations, insolvency-related events or unauthorised transfers of the lease.

Tenants may also negotiate termination rights in limited circumstances, such as casualty events, condemnation, failure to satisfy certain landlord obligations or the exercise of negotiated early termination rights. The availability of termination rights depends largely on the lease terms and bargaining positions of the parties.

There is no requirement in California that a commercial lease be recorded, and a lease is fully enforceable between the landlord and tenant whether or not it is recorded. The function of recording is not validity but notice and priority: recording an instrument in the county land records gives constructive notice to subsequent purchasers and lenders and fixes the priority of the recorded interest relative to later-recorded interests.

Infrastructure and renewable energy leases are the principal context in which recording is effectively required as a practical matter. Because these are long-term ground leases on which the tenant invests heavily in improvements, the tenant ordinarily insists on recording a memorandum to establish and protect the priority of its leasehold against later encumbrances. Priority relative to the landlord’s lenders is then managed contractually.

The lease typically provides that the leasehold will be subordinate to a future fee mortgage only on the condition that the tenant receives a subordination, non-disturbance and attornment agreement ("SNDA") from the fee mortgagee, under which the lender agrees not to disturb the tenant’s possession on a foreclosure so long as the tenant is not in default, in exchange for the tenant’s agreement to attorn to the lender.

A defaulting commercial tenant can be compelled to leave before the lease term expires, but only through the courts, as California prohibits landlord “self-help”. The exclusive summary remedy is an unlawful detainer action under Code of Civil Procedure Section 1161 et seq.

A lease can be terminated by a third party, principally through the government’s power of eminent domain (condemnation). A public entity (or other authorised condemnor) may acquire leased real property for a public use, and that acquisition can terminate or partially terminate the lease, subject to the payment of just compensation under the California Eminent Domain Law (Code Civil Procedure Section 1230.010 et seq).

California provides two distinct statutory remedy paths for a commercial landlord after a tenant defaults, and the choice between them is the central issue.

If the landlord terminates the tenant’s right to possession for breach, the lease terminates and the landlord may recover damages (California Civil Code Section 1951.2). The defining feature of Section 1951.2 is that damages are net of a duty to mitigate: the landlord’s future rent recovery is reduced by rental losses the tenant proves the landlord could reasonably have avoided.

As an alternative, even though the tenant has breached and abandoned, the lease continues in effect for so long as the landlord does not terminate the tenant’s right to possession, and the landlord may sue to recover rent as it becomes due. The key distinction is that this remedy lets the landlord avoid the Section 1951.2 mitigation calculus and simply sue for rent as it accrues, but it is available only if:

• The lease expressly provides for the Section 1951.4 remedy; and
• the tenant has the right to sublet or assign, either freely, subject only to reasonable standards/conditions or subject to the landlord’s consent, which may not be unreasonably withheld.

California construction projects use several pricing structures, and the choice allocates cost risk between owner and contractor and reflects how complete the design is when price is set. The most common are stipulated sum and cost-plus with Guaranteed Maximum Price ("GMP").

For work on residential property, California consumer protection statutes constrain how price may be structured. Under Business & Professions Code Sections 7159 and 7159.5, a home improvement contract must be in writing and state the agreed contract amount in dollars and cents (including all profit, labour and materials, excluding finance charges).

The statute also caps the down payment at the lesser of $1,000 or 10% of the contract price and prohibits the contractor from requesting or accepting payment exceeding the value of work performed or materials delivered. Because an open-ended cost-plus arrangement does not state a fixed contract amount, it does not comply with these requirements and is cause for contractor discipline, so cost-plus should be avoided or restructured.

Responsibility for design and construction may be allocated through a variety of project delivery methods, including design-bid-build, design-build and construction management arrangements.

Under traditional design-bid-build structures, the owner separately contracts with the design team and the contractor. In design-build projects, a single entity assumes responsibility for both design and construction, providing a more integrated approach. The allocation of risk, responsibility and project control varies depending on the selected delivery method and contractual structure.

Construction risk in California is managed primarily through contractual risk allocation devices, the most common of which are:

• indemnification provisions;
• warranties;
• limitations of liability; and
• waivers or exclusions of certain categories of damages.

Indemnities allocate responsibility for third-party claims (bodily injury, property damage, mechanics’ liens, IP and similar exposures); warranties allocate responsibility for defective work and materials, typically with a defined correction period and remedies; and limitation-of-liability and waiver provisions cap or exclude exposure (for example, mutual waivers of consequential damages, often paired with agreed liquidated damages for delay, see 7.4 Management of Schedule-Related Risk).

These are typically reinforced by insurance requirements (commercial general liability with additional insured and primary/non-contributory endorsements, builder’s risk, professional liability and waivers of subrogation).

Additional security and credit support, performance, payment and completion bonds, letters of credit, guarantees  etc are also commonly used to manage performance and payment risk; those are addressed in 7.5 Additional Forms of Security to Guarantee a Contractor's Performance.

Schedule-related risk is commonly managed through project schedules, milestone requirements, notice provisions and contractual remedies for delay. Construction contracts often establish substantial completion and final completion deadlines, together with procedures for addressing excusable and non-excusable delays.

Owners and contractors may agree to liquidated damages provisions that establish predetermined monetary compensation if specified completion dates are not achieved. The enforceability of such provisions depends on applicable legal requirements and the specific circumstances of the project, but liquidated damages are generally enforceable in California.

Owners and their lenders frequently require additional security to support contractor performance and payment, particularly on larger or more complex projects. The most common forms are:

• performance bonds, where a surety guarantees the contractor’s faithful performance and may complete the work or pay damages on default;
• payment bonds, which secures payment to subcontractors, labourers and suppliers and reducing mechanics’ lien exposure); and
• completion bonds, which assure lien-free completion, something frequently required by construction lenders to protect the priority of the construction deed of trust – these dovetail with the mechanics lien priority and title insurance points in 3.7 Subordinating Existing Debt to Newly Created Debts.

On private projects, bonding is a matter of negotiation and weighing premium cost against protection. On public works, bonding is mandatory rather than optional. Many public works statutes also require a separate performance bond in addition to the payment bond. For example: state department contracts must provide for separate performance and payment bonds by an admitted surety, each generally at least one-half of the contract price (Public Contract Code Sections 10221 to 10224).

California law gives contractors, subcontractors, material suppliers, labourers and certain design professionals mechanics’ lien rights against the improved property, if they are not paid for qualifying work or materials (Civil Code Section 8400 et seq; design professionals also have a separate lien right under Civil Code Section 8300 et seq).

The feature that makes mechanics’ liens especially significant is their relation-back priority. Under Civil Code Section 8450, a mechanics’ lien has priority over a deed of trust or other encumbrance that attaches after the commencement of the work of improvement (or that was unrecorded at commencement and of which the claimant had no notice). Because each claimant’s lien relates back to the single date the overall work commenced, rather than the date that particular claimant began, an otherwise properly recorded construction loan can be primed by later-filed liens if any visible work or delivery of materials preceded recordation.

Owners and lenders use several tools to mitigate and manage lien risk. Construction contracts routinely require the general contractor to indemnify, defend and hold the owner harmless against mechanics’ liens and stop payment notices arising from the contractor’s, or its subcontractors’, work, and to promptly bond around or discharge any lien that is recorded.

California prescribes statutory waiver-and-release forms that owners require as a condition of payment, and a waiver is null, void and unenforceable unless it substantially follows the applicable statutory form. Owners and lenders also use joint check arrangements, requiring and tracking preliminary 20 day notices, retention and title-company disbursement controls. On construction loans, they will use American Land Title Association ("ALTA") mechanics’ lien priority and date-down endorsements and payment/completion bonds.

Before a project may be occupied or used for its intended purpose, applicable permits, inspections and governmental approvals must generally be completed. Depending on the nature of the project, this may include building inspections, fire and life safety approvals, utility sign-offs and issuance of a certificate of occupancy or similar authorisation.

The specific requirements vary by jurisdiction and project type, but compliance with applicable permitting and inspection requirements is required before lawful occupancy and operation may occur.

The United States does not impose a value-added tax ("VAT"), and California does not impose VAT on the sale or purchase of real estate. Real estate transfers may, however, trigger documentary transfer taxes imposed at the county or municipal level, depending on the location of the property and the structure of the transaction.

Investors frequently consider transaction structures designed to reduce or defer transfer taxes and other transaction-related tax liabilities. The availability and effectiveness of these strategies depend on the facts of the transaction, the ownership structure and applicable state and local tax rules.

See 8.2 Mitigation of Tax Liability.

Foreign investors in US real estate are subject to a range of federal tax rules, including withholding requirements that may apply to rental income and certain dispositions of real property interests. The Foreign Investment in Real Property Tax Act ("FIRPTA") remains a significant consideration in many transactions involving foreign ownership.

Ownership of real estate can provide a range of tax benefits, the value of which depends on the investor’s structure, holding period and overall tax position. Common federal benefits include depreciation of improvements (cost recovery over the applicable recovery period), deductions for mortgage interest and operating expenses, cost-segregation studies that accelerate depreciation by reclassifying components into shorter-lived asset categories, deferral of gain through like-kind exchanges under Internal Revenue Code ("IRC") Section 1031, and, where available, qualified opportunity zone investment.

California does not fully conform to the federal depreciation regime, so federal and California depreciation benefits frequently differ and must be tracked separately. In particular, California does not allow federal “bonus” (accelerated) first-year depreciation under IRC Section 168(k), and it conforms to only a much smaller version of IRC Section 179 expensing than federal law permits. As a result, an asset is often depreciated on a faster schedule for federal purposes than for California purposes, producing different annual deductions, a different remaining basis in the property for federal versus California tax and corresponding state-level adjustments on the California return.