Jamie Krahne
If you are a tenant in a commercial building, chances are you have recently received your annual operating expense reconciliation outlining an amount due over and above what you paid throughout the year.
In our inflationary environment, there is no question that costs are high, but do you understand the accuracy? The lease document governs what can be included as an operating expense and passed back to the tenant proportionally based on square footage.
Whether you are under a triple net or gross lease, the mechanism to pass back expenses varies. Operating expenses and how they are passed back to the tenant can be laden with complexities making it difficult for a tenant to decipher validity.
Overlooking or misunderstanding these charges can have significant financial implications for your business, as year-end reconciliation sets a precedent for what you’ll be charged for subsequent years.
When you sign a lease, the first step is to ensure operating expense clauses are not overlooked. When negotiating lease terms for clients, it’s important to understand what can be passed back and the potential implications.
Do you have a cap on controllable expenses? What capital expense items can be passed through to you as the tenant? What fees can be passed through to you on a pro rata basis?
Given the high costs of energy usage, labor, and materials, there are few costs that are now considered “controllable,” but identifying areas that can be boxed in can help with cost predictability.
Tenants could become well-versed in operating costs, but ideally, they should look to their real estate advisers to navigate the labyrinth of lease language and operating costs. Seeking guidance from a real estate expert, like a commercial broker or property manager, can offer invaluable insights and help the tenant save both time and money.
As a seasoned real estate broker and property manager, I’m well-versed in the value that both disciplines bring. Below are the areas where involving either (or preferably both) can positively impact the tenant's financial results:
Expert analysis: A trusted real estate professional possesses specialized knowledge of lease structures, industry standards, and market trends. Engage them to analyze your lease thoroughly and the calendar year budget your landlord is referencing to establish your monthly operating cost payment.
Using that information, professionals can identify any discrepancies or overcharges on your year-end reconciliation. They will comb through the budgeted expenses versus actual expenses: do they align with the lease document, and how can they be passed back? Are there any expenses that stand out as unusual?
Cost control opportunities: They are adept at identifying opportunities for cost control and efficiency improvements. By analyzing operating expenses and benchmarking against market trends, they can help tenants optimize their financial obligations.
Dispute resolution: Once your reconciliation and lease are reviewed, if disputes or discrepancies present themselves, they provide expert guidance and representation. Presenting discrepancies to the landlord can help tenants achieve resolution and protect their interests.
Strategic planning: Unfortunately, operating costs will continue to increase. Real estate experts can assist tenants in developing long-term strategies for these expenses.
From lease structuring to space utilization planning, their strategic insights can drive informed decision-making and enhance tenant profitability.
The power of oversight became evident when assisting a client with their reconciliation. They were concerned about the 26% increase in the budget vs. actual expenses and questioned its validity.
I conducted a detailed review of the expenses against the lease agreement and general ledgers from the landlord. I then identified that most of the expenses stemmed from administration costs and management fees being 100% more than the prior year.
Ultimately, it was determined the landlord needed to reclassify most of the expenses responsible for the charges owed by my client.
After reviewing the documents with the landlord, they adjusted the expenses, and what used to be an amount due was now a CREDIT due to my client. They saved thousands of dollars, but more importantly, the tenant gained peace of mind knowing their interests were safeguarded by a knowledgeable ally.
In all fairness, having managed properties for many years and understanding the hard work landlords put in, it's important to recognize that they don’t intentionally attempt to recover expenses not allowed under the lease.
Sometimes mistakes are made; after all, we are still human beings doing more work with fewer resources. It’s important to give landlords the benefit of the doubt when discrepancies arise. We should all be reminded to approach disputes with respect and fairness.
In closing, high operating costs are here to stay and can have a significant economic impact; tenants should have a firm grasp on their obligations and rights. Tenants can ensure transparency, accuracy and fairness by engaging real estate experts to review and analyze operating expenses.
From negotiation support to dispute resolution, the expertise of these professionals empowers tenants to make informed decisions and protect their bottom line when it comes to the complexities of property operating expenses.
Jamie Krahne is senior vice president, healthcare at Dickson Commercial Group.
