We are in a time when building maintenance expenses have been increasing at a faster pace as compared to the past 20 years, so it is even more important to scrutinize the building expenses being charged by your landlord.
Most net leases have the tenants paying estimated building expenses each calendar year based on the landlord’s building expense budget to maintain the building and pay ongoing building expenses. The typical expense categories are Common Area Maintenance expenses (CAM), insurance, and real estate taxes. Some landlords might break out other expenses as well such as utilities or management fees.
Landlords will typically provide some level of detail about the building expenses versus the building budget and they generally follow the same format each year. As such, you can compare the costs charged in 2024 versus those that were charged over the past few calendar years to try and identify if there are any large increases in any individual expense line item.
After you have reviewed the 2024 expenses and the expenses in prior years, you should contact your landlord about any inconsistencies to ask questions. If there have been any large increases, ask what specific projects those increases pertained to and what the landlord is doing to try to keep expense levels reasonable.
A few keys areas to watch are:
Insurance: The cost of insurance policies has seen some rapid increases. What is your landlord doing to try to mitigate those increases, if anything? Are they modifying any coverages or looking at alternatives?
Real Estate Taxes: The type of building you lease space in impacts whether taxes have increased or not. Many office properties have seen tax reductions due to higher vacancies while many industrial and retail properties have experienced tax increases due to high occupancies and increasing rental rates. Each building is different, but if your taxes have increased it wouldn’t hurt to ask your landlord if they are considering appealing the taxes or if they work with the local tax assessor to try to limit annual tax increases.
Utilities: For office space occupants, the landlord typically pays the utility bills and then charges those costs back to the tenants based on their prorated share of the building square footage. Have those costs increased? What is the landlord doing to try to mitigate expense increases at the property? For example, are they retrofitting older equipment with newer, more energy-efficient equipment? Are they adjusting temperature levels to use less energy?
Capital/Leasing Costs: Leases generally prohibit the landlord from charging capital costs and leasing expenses as building expenses, so there should not be any charges pertaining to construction of tenant space improvements, leasing commissions, or major capital improvements for the building. That said, there are some leases that do allow certain capital expenses to be charged to the tenant so it is important to review your lease to determine what is¾and what isn’t¾allowed.
Looking to the future, there may be other avenues for your landlord to save money on expenses through competitive bidding, technology, or by changing the scope of the building services. A few to consider are:
Janitorial: How often is your suite cleaned? If your suite is cleaned nightly, could it be reduced to three times a week? Or perhaps there are certain cleaning tasks that could be completed less often based on actual cleaning needs, like vacuuming.
Lighting and HVAC: Does your landlord keep all the lights on at the building all day or have the hallways and restrooms been equipped with motion sensor technology? Using higher tech sensors to control lighting and other building systems can be expensive to install but the payback period is usually worth considering. In some cases, the landlord may be eligible for a rebate to offset some of the installation costs.
Window Treatments: Windows are a primary source of heat gain in the summer and heat loss in the winter at commercial buildings. Window blinds can be an effective way to limit heat gain and loss. While newer commercial buildings have black out shades and power blinds that provide insulating qualities, most older commercial properties have adjustable aluminum or vinyl blinds that don’t provide much benefit from an energy saving perspective. Retrofitting to thermal fabric blinds that form-fit the window openings do reduce heat gain and loss and should be considered.
Snow Removal: How often is the site plowed? What is the trigger level? Some landlords have parking lots plowed when it snows one inch while others don’t plow until it snows 2 inches. There is a tradeoff here but the building that plows less pays less.
Ultimately the landlord controls how they manage the property, but a mindful tenant can have some influence on the management decisions that impact building expense levels. Asking questions about how the landlord has been spending money on expenses and how they plan to control expense increases looking forward are worthwhile to protect your company’s bottom line and ensure the landlord is only charging costs that are allowed under the lease agreement. ITRA Global members are experts in their market¾find the one nearest you here.
Article submitted by Wayne Teig, ITRA Global l Minneapolis-St. Paul, Minnesota USA
