OPEX: The Hidden Costs, Part I
By Jason Jones and Kathy Burke, Principals
Much like a residential home, commercial office buildings experience normal operating expenses (OPEX) such as taxes, utilities, and ongoing maintenance charges. And, as is the case with a home, the occupant is billed for these expenses on a monthly basis.
Every year, landlords provide tenants with their annual operating expense reconciliation statements. This statement is basically a “true-up” of the actual costs incurred by the landlord versus the costs budgeted and already paid by the tenant. When you receive this document, it would be worthwhile to take a closer look to confirm whether or not the charges are appropriate.
In spite of everyone’s best efforts, there are often mistakes within these documents. Aside from mathematical errors, it’s important to realize most landlords issue their reconciliations based upon the “standard” lease, and your lease may deviate from that standard.
What should tenants know?
A well-negotiated lease document will clearly define allowable operating expenses, detail proper accounting treatment, and specify which costs are not allowed to be charged to the tenant. Typically, “operating costs” include your real estate taxes, cleaning, common area maintenance, building insurance, management fees, and repairs that had to be done during the year.
In practice, your landlord will estimate property expenses for the upcoming calendar year. Tenants pay their percentage share each month throughout the year, based on the budgeted amount. At the end of the year, the actual expenditures are calculated, and during the first quarter of the following year, the landlord will deliver an annual reconciliation statement. Over the course of the lease, these adjusted operating expenses can become a significant expense that should, at the very least, be reviewed and justified. Note that there is enough gray area in calculating operating expenses that entire businesses exist just for the purpose of auditing these costs for tenants.
When should tenants be concerned?
If the expense numbers appear excessive, you should ask your landlord for an explanation, subsequently following up with your real estate adviser to confirm whether or not they are consistent with the market.
Often, the best way to ensure accuracy is to request that your real estate advisor perform a “desk-top” audit. The first indicator of a billing error is an excessive percentage increase from your last year’s operating expense statement. Note that with the exception of taxes, insurance, utilities, repairs, and maintenance (based on the age of your building), it is customary for most categories of operating expenses to escalate less than 5 percent per year. Anything beyond this number requires further clarification. If you reach a double-digit number, an explanation is due.
Stay tuned for Part II, where we will discuss issues to look out for, what tenants can do to mitigate expenses, and what tenants should ask their landlord for.
Tags: corporate real estate, landlord, lease, opex, tenant
This entry was posted on Wednesday, February 16th, 2011 at 7:00 am and is filed under Transaction Management. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.