Operating Expenses Of Your Office Lease...are you overpaying?

If your company leases office space, by now (April) you should have received--or will soon be receiving--your annual operating expenses reconciliation statement from your landlord.  Here I will briefly explain what these statements are and recommend 6 steps you should take before paying your reconciliation invoice. 

Most office leases require each tenant to pay their proportionate share of increases in the building’s operating costs over the first lease year, or “Base Year.”   Through a budgeting process your landlord will estimate what the annual increase will be and will then require that you pay your share (on a monthly basis) of the increase portion only.  At the end of each year a reconciliation or “true up” of the estimates you’ve paid during the calendar year versus the actual expenses incurred is calculated.  This is your reconciliation statement.  Furthermore, the landlord will provide you an estimate of the current year’s estimated expenses and will adjust your monthly estimate accordingly for the remainder of the calendar year.

Don’t give up if at first you don’t understand your reconciliation statement.  These documents are often confusing and sometimes lack the detail needed to perform any meaningful review.  Whether you involve a Tenant Advisor or go it alone, you should ask questions until you understand the statement.  

In some instances—probably more frequently than you realize—errors are made or provisions of the lease are not followed, resulting in tenants’ being overcharged by significant amounts (up to tens of thousands of dollars per year).  To ensure this doesn’t happen to you, I recommend that you:

1. Thoroughly review and completely understand your Base Year expenses statement.  Every reconciliation statement you receive throughout the life of your lease will link back to this Base Year statement; if it is incorrect or if it understates what expenses would have been for a fully or near-fully occupied building, you will pay more than you should every subsequent year of your lease term.
2. Ask for supporting documents if your reconciliation statement doesn’t show a comparison by expense categories--such as taxes, insurance, utilities, landscaping, payroll, management fees, etc.--between the Base Year and the year in question.  
3. Look for expense categories that have experienced an unusually high increase over the Base Year or the previous year’s levels and find out the reasons for such large increases.
4. Confirm that any expense increase has not exceeded any caps or limits your Tenant Advisor may have negotiated in your lease.
5. Confirm that expenses your Advisor may have specifically negotiated out of your lease (such as lobby artwork, capital expenditures, landlord’s travel expenses, marketing costs, etc.) have not been included in your statement. 
6. Ensure that your proportionate share--defined as a percentage equaling your suite’s rentable square feet divided by the building’s total rentable square feet--has not changed from previous years’ statements nor from the percentage listed in your lease.

If after taking these steps you feel that errors have been made or provisions of your lease have not been followed and if your landlord is unwilling to address them to your satisfaction, your lease should provide  you the right to have an accountant or advisor perform a full audit.

As you work to minimize your company’s real estate costs, there are several items beside the rent you pay that require your attention and vigilance—operating expenses are among the most important.  

The next time you sign a new lease or negotiate an extension to your current lease, consider retaining a Tenant Advisor who understands the complexities of commercial leases and can help you achieve the lowest costs and greatest benefits from your office space.

Mike Chappell is Vice President at Cresa Salt Lake City, where he and other Advisors specialize in representing office and industrial occupiers.  For more information, visit cresa.com/saltlake. 

For a complimentary review to ensure your operating expenses reconciliation statement is in compliance with your lease, contact us and we’ll be happy to help.