Do Operating Expenses Matter?

Building Operating Expenses (“BOE”) has many meanings, many abbreviations, a long history but most critical they can be an overlooked or mismanaged when you are projecting your real estate budget and administering your lease.

I loved sitting with my father-in-law, Lionel Edison, and hearing him tell stories of his days taking the train into New York City with his boss, Irv Schneider, one of the founders of Helmsley-Spear. Lease rates were flat for the term and only items like separately metered utilities or janitorial were paid directly by the tenant to the vendor. There were no additional charges to the tenant over the term. Sort of like being in one of Harry’s hotels. 🙂

Years later, landlords looked for ways to protect themselves from both unexpected cost increases and runaway inflation.  The solution was two-fold. First, rather than flat rates, landlords began charging step rents…yearly fixed increases based on different criteria. Eventually they looked for even more protection by charging back to tenants any increases over a predetermined amount often illustrated as a Base Year or Expense Stop.Double dipping?

But the BIG question…can a tenant do anything to protect themselves against what could be run-away charges and if so what?

In March, 2012, I was invited to speak before the Real Estate Section of the Orange County Bar.One of the first questions that came up was what protection do I recommend for tenants regarding building operating expenses.Challenging question when you deal in reality.

Terry Barger, President to Cyberlease, one of the country’s leading lease audit firms provided me his BOCA form, an extensive list of inclusions and exclusions to look for and negotiate in a lease. I refer to this in almost all negotiations.

Early in my career I spent a whole lot of time negotiating almost all items noted in the BOCA. What I came to realize was simple, “Size Matters.” Not what you may want to hear but it is reality.

Think of this. The average tenant in most markets occupies about 3000 SF. If the BOE increase amounts to about $.03/sf/month, you’re looking at about $1000 per year. While Mr. Barger concurs that “Bigger is Better,” if the landlord makes an error in calculations or misappropriates a line item, after fees, what is your immediate savings or over the term?

By no means are we saying you should just live with what the landlord sends your way. Always review your operating expense statements. Always look to negotiate issues that may have an impact on your business. But with that comes a responsibility to have someone internally or externally review that statement.

What have we found when reviewing statements for our clients? There have been many errors both big and small.

Here are a few: Recently a small error in addition resulted in a $675 one time credit…enough to by the owner that new IPad he longed for. Another building attempted to expense out the capital cost of replacing the HVAC system in one year rather than amortizing it over the normal life. Over the term it would have cost my 5000 SF client over $10,000. In a real case of abuse, one landlord tried to charge back the cost of his docking fees for his yacht claiming he took tenants out on the boat for fishing (marketing should NEVER be included in BOE).

Recently, I discovered an anomaly in the parking charges. In working with the landlord we were able to make a reasonable adjustment that in the case of this 25,000 SF user resulted in an immediate credit of several thousands of dollars. Had the landlord continued unrestricted for the remainder of the term the charge my client, the additional costs would have escalated to well over $90,000. If you were a 3000 SF user in that property you would have been a beneficiary of that “find.”

I will address some of these other issues and strategies in the future, feel free to search our Tenant University or go to the Archives from previous Tenant Tactics on our web site.

The key issue is to pay attention to your yearly statements and compare them from year to year. If a line item increases significantly, ask for more support information. It’s your money.

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