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Let’s define a
couple of key terms - shall we?
Operating
Expenses. Typically
defined as the costs of maintaining the commercial real estate in which you
reside.
Lease
form. Forms of leases
vary as widely as days of the week but commonly are either net or gross.
Meaning - your base rent is net of the operating expenses - or in the case of a
gross lease - your base rent includes operating expenses.
Now let’s dive
in!
What
expenses are included as operating expenses. Biggest in this category are property taxes.
Currently, property taxes are based upon roughly 1% of the building’s assessed
value. I say roughly because certain cities may add fractions to this
percentage. You can easily check on the amount through your county assessor’s
website. Next, insurance on the property - which is different from the
liability policy you carry for your business and contents.
Finally, common area
maintenance which is a broad category of expenses which can encompass mowing
the grass, trimming the trees, sweeping the parking lot, disposing of the
trash, exterior lights, property management, changing the air conditioner
filters, and reserves for capital expenditures such as roof replacement.
Treatment of these CAMs - as they are called - varies widely among owners.
Simply, some may not bill for these until due whereas others may budget for
them monthly. Still others may not ask for any reimbursement.
What
expenses are not included in operating expenses. A major system replacement - such as a
new roof or air conditioner - or, changes made to the exterior of the building
- like new pavement or parking lot lighting - falls into a class known as capital
expenditures. As noted above - some landlords budget for these through
reserves while others bill their tenants when the changes occur. Please check
your lease. Treatment of these costs should be outlined. Commonly - language
allows your owner to bill you for portion of these expenses spread over time -
but not a lump sum. Expenses related to accounting, mortgage interest, entity
fees, and business licenses should not appear on your invoice.
Gotchas.
If an ownership
change occurred recently - property taxes will increase based upon the sales
price. As a tenant - you generally shoulder this bump. Watch out for
generalized expenses. Most leases allow for you to reasonably audit any
expenses you’re asked to reimburse. If you don’t understand a line item or if
your owner simply sends you a flat amount to pay - ask for back-up. Check to
see if your lessor can require you to paint the exterior. This clause killed a
deal for me recently.
Finally, anticipate these costs when you negotiate your
next lease or renewal. Simple things like asking for operating expense
increases to be limited or moving a base year forward can save you loads.
Allen
C. Buchanan, SIOR, is
a pricipal with Lee & Associates Commercial Real Estate Services in Orange.
He can be reached at abuchanan@lee-associates.com or 714.564.7104. His website is allencbuchanan.com.