AB 98 can turn your expansion option into a building the state won't let you build
An expansion option is the cheapest growth a tenant ever buys. Since January 1, 2026, the state decides whether the building that option describes can be built at all, and the standard Inland Empire lease form leaves that gap sitting on the tenant.
AB 98 can turn your expansion option into a building the state won't let you build
Since January 1, 2026, California treats an addition of 20% or more of a warehouse's non-office space as an expanded logistics development. On a 200,000 SF building on industrial-zoned land with a 50,000 SF expansion right and homes within 900 feet, that can require every new dock to sit at least 300 feet from the homes' property line and leave you running a second building at about $380,000 a year. Your option was written before the rule and prices only rent.
On a 200,000 SF Fontana distribution building with a right to add 50,000 SF, AB 98 can cost you about $380,000 a year, $1.90/SF/yr. That is the cost of running a 50,000 SF satellite eight miles away when the addition your lease describes can't put its docks where the drawing shows them: 15% of IE West asking rent, every year, for growth you thought you had secured.
The trigger is a definition. Government Code 65098: “‘Expansion’ means the expansion of an existing logistics use development by 20 percent or more of the existing square footage. Office space shall not be included as part of the existing square footage or in the square footage for the 20-percent expansion threshold.” Take 10,000 SF of office out of a 200,000 SF building and the line sits at 38,000 SF. A 50,000 SF addition is 26.3%.
200,000 SF + 50,000 SF = 250,000 SF → 300-ft dock setback if any bay is within 900 ft of a home, school, daycare, park or hospital
Once the addition counts as an Expansion, the size of the result decides the tier. Government Code 65098.1(a) applies to “any proposed new or expanded logistics use development 250,000 square feet or more where the loading bay is within 900 feet of a sensitive receptor” on industrial-zoned land. That development must meet every Tier 1 warehouse design element, orient its bays away from the nearest receptor “to the extent feasible,” and “locate truck loading bays a minimum of 300 feet from the property line of the nearest sensitive receptor to the nearest truck loading bay opening using a direct straight-line method.” Tier 1 adds solar plus battery storage, a cool roof, truck-charging readiness, installed EV chargers on 10% of passenger spaces and zero-emission forklifts by January 1, 2028, to the extent operationally feasible.
Read on its text, the 250,000 SF test measures the expanded development, existing building plus addition. A 200,000 SF building with a 50,000 SF right lands exactly on the line. We found no Inland Empire city guidance on how it is measured. A planner who counts only the addition moves you to 65098.1(d), which requires orienting bays and routing trucks away from receptors and buffering light and noise, with no setback. That version costs more to build. The text-based version may not be buildable at all. On land not zoned industrial, 65098.1(c) sets a 500-foot setback across Riverside and San Bernardino Counties and named cities including Fontana, Ontario, Rancho Cucamonga and Moreno Valley.
Nobody priced this because nobody had to. A competent broker negotiates the expansion rent, the notice window and the delivery date. Before AB 98, an addition on land already zoned industrial was a building-permit question, so no one re-read the option against siting law at renewal. The statute exempts “logistics projects that were subject to a commenced local entitlement process prior to September 30, 2024.” An expansion pad entitled as phase 2 of the original approval may qualify. A bare lease option is not an entitlement.
The lease decides who carries the gap, and the standard Inland Empire form puts it on you. AIR CRE's Standard Industrial/Commercial Single-Tenant Lease, ¶2.3(c), the same allocation First Industrial used with National RV at 100 West Sinclair Street in Riverside in 2007:
The same form measures compliance against the laws “in effect at the time that each improvement, or portion thereof, was constructed.” An addition built in 2027 answers to 2027 law. Tenant-built expansion rights typically let you build “at its cost” once you have “obtained all necessary governmental or municipal permits.” Landlord-built rights usually say the landlord “shall not be obligated to commence” until it receives approvals and “shall not be liable for any damage whatsoever” if it never delivers. Either way your remedy is the same: the option quietly lapses, and you find the space somewhere else.
1. Now, or at least 18–24 months before your expansion notice window or renewal, run the division. Addition SF over existing SF minus office SF. At 20% or more, the addition is an AB 98 Expansion. Add it to the existing building. At 250,000 SF or more on industrial land, the 300-foot dock setback and Tier 1 apply.
2. At the same time, measure straight-line from every proposed new dock opening to the nearest residential, school, daycare, park or hospital property line. Under 900 feet, the statute is in play. Under 300 feet on a 250,000 SF result, the drawn expansion fails.
3. Ask the landlord in writing whether the expansion pad was inside a local entitlement process commenced before September 30, 2024. If it was, put the approval number into the lease as a landlord representation.
4. At renewal or any amendment, don't trade rent for an expansion option without an AB 98 rider. Sample language: “Landlord represents that, as of the Effective Date, the Expansion Building as depicted on Exhibit __ complies with Government Code Sections 65098 through 65098.6 as then in effect, or is exempt as a project subject to a local entitlement process commenced before September 30, 2024. If any Applicable Requirement in effect when Tenant delivers its Expansion Notice (i) requires a reduction of more than 10% in the Expansion Building’s square footage or dock count, or (ii) increases Landlord’s projected construction cost by more than $__ per square foot, then Tenant may, at its election, (a) accept a reconfigured Expansion Building with Expansion Rent reduced proportionately, (b) rescind its Expansion Notice without penalty, or (c) require Landlord to deliver comparable space within __ miles on the same rent and term, with Landlord reimbursing Tenant’s reasonable dual-site operating costs for the remaining Term. Costs of compliance with Government Code Section 65098.1 shall not be a Capital Expenditure triggered by Lessee under Paragraph 2.3(c).”
5. If the option prices expansion rent off construction cost, cap the Tier 1 increment or exclude it from the cost base.
6. Last resort: size the addition under 20% of existing non-office space, 37,999 SF on a 190,000 SF base, and phase the rest.
200,000 SF Fontana distribution building with a 50,000 SF expansion right
Assumptions, not survey figures: industrial-zoned land, 10,000 SF of office, lease signed 2022 with a right to add 50,000 SF of warehouse on excess land. Homes across the street put the new docks inside 900 feet and under 300 feet, so the drawn addition fails 65098.1(a)(3). The fallback is a 50,000 SF satellite 8 miles away at the same rent as the expansion. Eight shuttle round trips a day, 16 miles each, 260 days, at ATRI’s $2.336 per mile. Duplicate staff of one supervisor, two forklift operators and one laborer at BLS May 2025 Inland Empire mean wages plus a 30% burden, and two forklifts at an assumed $1,000 a month each. Substitute your own trip count, distance and staffing.
Over five years that is $1,898,296. At 4 round trips of 12 miles the penalty is $331,070, $1.66/SF/yr; at 12 round trips of 24 miles, $476,837, $2.38/SF/yr. The rent differential is set to zero. If your option fixed expansion rent below today’s market, the true cost is higher. ATRI’s rate is a national truckload figure including driver and fuel. See the full dashboard.
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I read industrial leases across San Bernardino and Riverside Counties. Send me the expansion or option language, the building square footage, the office square footage and the address, and I will run the 20% division and measure the straight-line distance from the proposed docks to the nearest sensitive receptor.