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So what’s included? Contained within the invoice is an
estimate of property taxes, insurance for the structure, and various
maintenance line items - such as roof, landscape, air conditioning and so on.
Typically, these estimates take into account what’s known and what’s
anticipated for next year.
Property taxes. Specifically, property taxes will
be known - sort of. Owners receive their property tax bill in October for the
last six months of the current year plus the first six months of next year.
Yep. You got it. If you receive a bill now for expected charges next year - the
last six months of next year are unknown. Confusing? Yes. Since County fiscal
years run differently than calendar years - most landlords simply figure a
small pop will occur and invoice accordingly. However, if your building sells
or if The California Schools and Local Community Funding Act should pass
- prepare for a large increase!
Property insurance. Insurance on the structure tends to
be fairly easy. Policies are written annually. If the owner of your building
and his insurance broker are in synch - not the Boy Band, BTW - these renewals
can occur in December - allowing for the owner to allocate accurately.
Maintenance. Other expenses - such as mowing the
grass and clearing leaves from your roof - can be predicted through yearly
renewable maintenance contracts.
But what’s not included? If your owner hires someone to
collect the rents and pay the mortgage - AKA a property manager - most likely
this isn’t included in your CAM. Bank charges, depreciation, legal and
accounting bills, and debt service are not generally your responsibility.
Major
improvements - such as resurfacing the parking lot, changing the storefronts,
installing drought tolerant landscape, employing solar panels, or replacing the
roof - are afforded special treatment in your lease. Known as capital expenses
- significant dollar expenditures - they are normally billed back over a number
of years vs a lump sum transfer to a tenant.
Do I pay these? Yes! Companies who rent their
business home are bound by lease agreements - unless your landlord has allowed
the contract to lapse - at which point a month-to-month relationship exists.
Regardless of the term remaining - lease contracts are generally one of two
persuasions - a Net or Gross lease. And you pay operating expenses with BOTH.
With
a Net - or sometimes called a NNN or Triple Net lease - you commonly pay as you
go. Base rent is paid monthly and operating expenses are paid separately as
they occur. In other words - property taxes twice a year, insurance once a
year, and other maintenance as it happens. Remember - roof, HVAC, and trimming
the bushes are all your responsibility - in addition to your rent. Some owners
figure it’s easier to simply calculate what their occupants will pay and divide
the number by twelve vs relying upon the tenant to pay when due.
With
a Gross - or sometimes called a Modified or Full Service Gross lease - your
expenses are baked into your base rent. A word of caution here. Some believe a
Gross lease limits increases in monthly payments. After all - a base rent bump
is specified. But, most Gross leases allow an owner to recapture an increase
over your first year’s expense - known as a base year. A double whammy!
Can I dispute the charges? Of course! Typically you have
a right to audit the invoice - even requesting specific calculations and back
up documentation. Plus, if an owner over or under estimates - there is a
reconciliation the following year.
It’s
been my honor, dear readers, to converse with you weekly - not weakly hopefully
- this year! My best wishes to you and yours for a magical holiday season!
Merry Christmas, Happy Hanukkah, and Joyous Kwanzaa to you all and to all a
good night!
Allen
C. Buchanan, SIOR, is
a principal 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.
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