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What do landlords typically include in operating expenses?

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On Behalf of Lanard and Associates | Aug 4, 2016 | Firm News

Navigating a commercial lease always comes with challenges. Despite seeming to be boilerplate, most of the lease will be negotiable.

One of the challenges with commercial lease terms comes with the additional rent that the landlord passes through to the tenants on a prorated basis to reimburse the landlord for its operating expenses. This can seem like a standard part of the lease. Still, many of the line items under “operating expenses” can be negotiable.

These are some of the common items a landlord may include under the operating expenses of a commercial lease that should be examined and negotiated.

What are operating expenses for a commercial landlord?

Just like your business has operating expenses, so does your landlord. Typically, your landlord will charge you (and the other tenants) a certain prorated amount to cover the taxes, insurance and operating expenses of the common areas like the parking lot, roof, common walkways and bathrooms.

When reviewing these charges, many of the operating expenses that are passed through by the landlord should not be the responsibility of the tenants to reimburse.

Can I really negotiate this?

No matter where you are from, negotiation can feel uncomfortable, especially if you do not do it often. It is important that you or someone you retain, advocate for your interests in the lease. The landlord has taken measures to make sure the lease includes what they want. Negotiating the lease is when you take your turn to represent what you want in the lease. Retaining an experienced attorney to assist you allows you to step back and let the attorney push to put you in the best possible position.

The operating expenses should be negotiated, especially since they can quickly become a significant part of your rent. Operating expenses are not boilerplate terms and should be openly reviewed and negotiated.

As you are reviewing the lease, keep in mind that some landlords may use alternative wording to describe these expenses. You may see terms like “additional rent”, “CAM”, “triple net” or other references to these costs.

This is part of the reason it is so valuable to have an experienced attorney like those at Lanard and Associates, P.C.supporting you through reviewing a commercial lease. The attorneys at Lanard and Associates, P.C. know what to expect and when terms need to be added, deleted and/or revised.

Capital expenditures

One of the most common operating expenses a landlord will want to include as part of the charges passed through to the tenants are capital expenditures. These tend to include projects and expenses for the building as a whole, such as:

  • Repaving the parking lot
  • Handicap curb cuts
  • Replacing the HVAC system
  • Updates or upgrades to the lobby or other common areas
  • Roof replacement

Although these are areas that you and the other tenants share, these capital expenditures should be the responsibility of the landlord. Capital improvements or expenses are not typically charges that tenants should have to pay.  These improve the overall value of these common areas and benefit the landlord, so they should not be reimbursed by the tenants.

Legal fees

Among the many expenses, your landlord has in operating a commercial building are legal fees. Landlords often will try to include their estimated legal fees for matters such as:

  • Zoning changes
  • Tenant disputes
  • Lease enforcement
  • Costs to prepare leases for new tenants

While these are part of a landlord’s costs of doing business, they should not be passed through to all the tenants as part of the common area expenses; these should be expenses that the landlord solely covers.

Repairs

Repairs to the common areas, such as the walkways, public bathrooms, roof, parking areas, etc. are reasonable charges to pass through to all the tenants as part of the additional rent.  But charges for repairs caused by other tenants, landlord’s agents or contractors, etc., should not.  These charges should be paid for by the party or parties causing the need for repair.

Administrative Charges

Commercial landlords often try to insert a fee (usually a percentage of the common area charges) for administrative expenses.  This is meant to cover the landlord’s costs for its employees that handle maintaining the repairs and other portions of the common areas, like snow removal, landscaping, etc.  However, the proper amount to be charged for these costs should be negotiated as it is often just a way for a landlord to obtain more profits from the rents.

Keeping your landlord accountable

One of the problems with a vague term like “operating expenses” is that it could include many things. Unfortunately, vague terms can allow a landlord to use the funds for expenses that should come from another area in their operating budget.

Part of keeping your landlord accountable for how they use these funds is by clarifying these expenses in the lease itself. A detailed listing of what is included, and, even more importantly, what is excluded, from the charges passed through to you as a tenant is critical.

In addition to your itemized list of what your landlord can consider an operating expense and what is excluded, you should also consider an annual cap on these expenses. Operating expenses should not be an area where your landlord can continually raise the rent by raising these fees without justification.

Also, when you are negotiating your lease, there should be a provision that gives you the right to audit your landlord’s books and expenses. Typically the audit would be paid for by the tenant unless the landlord has overstated the expenses by a certain percentage, in which case it should be stated that the landlord pays for the audit.

Engage the right help

Entering into a commercial lease is a significant expense for you and your business. It is essential to have the right team on your side when it is time to negotiate the terms of your lease. You may be tempted to use a friend or family member to look at your lease. However, if they do not have experience with commercial leases, they may not know the important terms to negotiate.

It is critical to talk to an experienced attorney who can give you valuable insight on your commercial lease. A commercial lease attorney will recognize terms that need to be added to the lease to protect you, or are too vague and will recognize opportunities where you can negotiate better terms in the lease.