What to Exclude and Why

Reason #1

Any Expenses Related to Renewing Leases This category is somewhat ambiguous. What is a lease renewal expense? Every real estate professional knows that the landlord most makes money when a tenant, renews. Why? Lower tenant improvement expense, lower commission expense, no vacant space down time, etc. Almost everything the landlord does for you after you move into your space is designed to get you to renew, i.e. luncheons, parties, breakfast's, invites to special events, management customer service programs, etc. Therefore, since the renewal process is in fact a leasing process, then why should you pay for any part of it? You shouldn't.

Reason #2

Any Expenses Related to Renewing Leases

This category is somewhat ambiguous. What is a lease renewal expense? Every real estate professional knows that the landlord most makes money when a tenant, renews. Why? Lower tenant improvement expense, lower commission expense, no vacant space down time, etc. Almost everything the landlord does for you after you move into your space is designed to get you to renew, i.e. luncheons, parties, breakfast's, invites to special events, management customer service programs, etc. Therefore, since the renewal process is in fact a leasing process, then why should you pay for any part of it? You shouldn't.

Reason #3

Tenant Specific Expenses

You should not pay for any expenses related specifically to another tenant, i.e. 1) additional electric consumed whether due to computer installation or additional hours of operation, 2) special tenant specific cleaning, 3) special tenant specific maintenance projects, plumbing, etc., 4) any full floor tenant maintenance and repair items, etc. Make especially known sure that you are not paying for anchor tenant landlord giveaways. Many lanlords are notorious for giving away the store to the anchor tenant. How will you know, through the audit of expenses.

Reason #4

Beware of the Administrative & Miscellaneous Account (Catch all Clause)

The administrative account usually contains the management fees, management office expenses, tenant relations, and any corporate expenses. Items you should look for and argue against are as follows:

a) Tenant Relations - As discussed, all leasing related expenses whether a new lease or renewal should be deducted and tenant specific expenses should be paid for by the landlord or the specific tenant involved. These expenses do not relate to you or help you. Thus you should exclude these items.

b) Owner/Manager in Management Fees Should be Excluded - If a third party is managing the building for the landlord, then the management fee is truly a landlord/building expense, and is fair. However, in an owner managed property, the management fee is a source of income for the landlord. Why should you be absorbing a portion of that management fee expense which in reality is landlord income. You don't pay for a portion of rental income. Why should you pay a portion of management fee income. Income is income isn't it. Particularly if you are already paying for the Property Manager, the staff, and the management office expense. As a fallback position, you could offer to pay your proportionate share of any increases in expenses related to the owner's actual out of pocket increases i.e. salary increases to the accountant and or the engineer who oversee the property (usually one accountant handles up to five buildings, engineers 5-10 buildings your monetary share would be minuscule).

c) Customer Relations/Service Seminars, Programs, etc. - Before you move into a building, and sign the lease, you are told about the great customer service (1990's Buzz Slogan) that the current landlord/management agent employs. So why should you now pay for national training seminars/conventions that emphasize customer service/relations? Why should you pay to "train" your "professional" Property Manager? A reasonable question to ask. You expect the air conditioning to work, the elevators to work, the cleaners to clean, why shouldn't the Property Manager know how to manage and know about customer service/relations? And remember all customer service programs are either tenant specific or designed to improve lease renewal percentages. Both categories should be non-escalatable

d) Corporate Management Expenses - Engineering, Accounting, etc. - All escalation clauses usually exclude corporate expenses. However, many landlords/management agents have ways to recoup at least part of their corporate expenses; particularly engineering expenses. They include the corporate/regional engineer's hourly rate charges allocated to the property maintenance/capital projects. This practice should be addressed during initial lease negotiations. You should not pay for any corporate personnel. They may also try to include internal accounting/audit charges in the building expenses. Keep your eyes open. Audit the books and do not pay for any part of these items. These are landlord expenses.

Property Management Negligence/Incompetence/Related Expenses

5. The best way to illustrate this category is to give an example. Example: A water bill for a property increased $8,000; billing period to billing period. It was discovered that an irrigation pipe broke, resulting in a major underground leak costing the building $8,000 in excess water charges. This $8,000 expense would surely increase the annual utility expense account by $8,000. The increase would be passed on to the tenants in the form of an increase in operating expenses. If the building engineers had been checking the water meter readings on a daily basis, the leak would have been detected in one day and the bill would have been a small portion of the $8,000. Why should you pay for the landlord's oversight? You shouldn't. Similar maintenance problems occur in the roofs, landscaping and mechanical rooms all the time. These items can add up to tens of thousands of dollars per annum. Why should you have to pay a share of management's mistakes. They don't pay a share of your corporate mistakes. Do they?

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Jack Saltman

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