GOT YOUR ESCALATION BILL YET ???

Happy New Year !!

Over the next week or two, if you’re a Tenant in an office building anywhere in the United States with a Modified Gross Lease,  your Landlord is about to send you  a New Years surprise,  a bill for your estimated overage for your proportionate share of your building’s 2008 operating expenses. 

Some Tenants pay the bill without question, more savvy Tenants first scan their lease and find on the first page or second page of the lease document, a paragraph entitled “Annual Increases” or “Operating Expenses”, this seems to explain that the Landlord has the right to pass any overage or estimated overage in the annual operating expenses, that will be incurred by the building in the upcoming year.  It further explains that the Landlord has the right to estimate these costs initially, since your being billed in advance, there’s no way the Landlord will know what the actual cost will be until around April or May, so they’ll adjust this bill upward or downward once they know.   

Even the savvy Tenant is at risk under this scenario.  Just imagine: 

The building’s operating expenses last year were $7.00 psf foot, your paying a rental rate of $20.00 per square foot on a “full service” lease.  This year’s increase in the building’s operating expenses are 3% higher than they were last year.  On a $20 full service rate in a building that has an operating expense of $7.00 psf this means the Base rent portion of your lease is $13.00 and the operating expense portion of your lease is $7.00.  If the lease allows the Landlord to increase your Base Rent 4% per year then the $13.00 Base rent is the portion of the rent that should be increased 4% while the $7.00 balance, operating expenses, should be increased separately by 3% .  Unfortunately in most cases the $20 is increased by 4% then an additional bill for overages is sent along to the Tenant, thus creating a double charge for operating expenses for the Tenant.  Most Tenant’s Pay the Bill, even the savvy Tenant who read the paragraph of “Annual Increases” or “Operating Expenses.”  At first glance it appears this lease clause would appear to allow a Landlord to do this.  It shouldn’t.    

The practice of double hitting has been going on so long and so few Tenant’s question it that it’s become an acceptable market standard within the industry.  BEWARE !!! 

Most leases list the items to be included and considered operating expenses for clarification.  The following items should not be acceptable to a Tenant when negotiating a lease: 

1.      Leasing Related Expenses:  Examples of these expenses would be items such as leasing commissions, tenant improvement allowance, marketing, entertainment, lease renewal commissions or bonuses,  etc.    Remember by virtue of additional leasing activity in the building your occupancy costs will automatically rise due to the fact that more tenants increase the building’s costs for additional cleaning, utilities and labor. 

2.      Tenant Specific Expenses:  In many cases, in order to lure a major Base Tenant a Landlord may offer them a very low rate or special incentives, such no charge for after hour utilities even though they operate 24/7; additional maintenance services at no charge, reduced common area factors, with the intention of making up the lost revenue by passing on those losses to all the other Tenants in the Building.   

3.      Watch our for General Terminology:  A favorite phrase found in many leases is “Administrative & Miscellaneous Account,  Items found hidden under this clause are usually items such as: 

A.     Tenant Relations.  This should be considered a lease related expense,  is of no direct value to you and should be eliminated. 

C.     B.  Management Fees Being paid to the Building Owner:      Only   when an  outside entity or firm is managing the building on behalf of the Landlord is the management fee for the property, than this would be a true operating expense for the property, but if the owner is paying him or herself a fee to manage the property it’s merely another income stream for ownership, if you’re already paying for items such as Property Manager & staff as well as management office expenses.  If the Landlord won’t back off this demand try countering by offering to pay your proportionate share of  salary increases for the building engineer or building accountants. 

C.     Education & Training Programs for Building Staff: The staff, although it sounds a bit impersonal, are part of the services being offered by the building, much like the elevators, a/c units etc.  As a Tenant you have the right to believe that all services being offered by the building are working at peak performance.  If something needs to be repaired or fixed this is a Landlord’s expense not one that should be passed on to the Tenant. 

D.     Corporate/Regional Personnel Expenses:  Escalation clauses should not include expenses being paid to corporate or regional personnel such as a corporate or regional engineer or corporate accountants.  Many Landlords try to find ways to recoup at least part of their corporate or regional expenses by trying to include hourly rate charges allocated property maintenance or capital projects.  You should also beware of internal accounting charges.  When you receive your bill for overages exercise your option to audit the books and take the position that these are Landlord expenses and you shouldn’t have to pay for these items.

Click here for : EXPENSES THAT ARE GENERALLY ACCEPTABLE FOR INCREASE UNDER THE TENANT’S PRO-RATA SHARE.