Although most commercial real estate professionals may tell you that operating costs are not a negotiable lease provision, there are aspects of these costs that can be changed to the tenant’s favor. As we explain in our book, Negotiating Commercial Leases & Renewals for Dummies, the landlord wants to make sure that tenants pay all of the property’s operating costs – there’s nothing unusual about that. When we analyze operating costs for groups of tenants in a building, we frequently find that tenants are subsidizing capital improvements that the landlord is using to enhance the building’s value.
If a formal lease document uses sufficient detail to define what constitutes an operating cost, then the tanning salon tenant has a fighting chance to at least examine, question and negotiate each item. We remember one Florida landlord who charged his tenants an annual fee to contribute toward a pool of money available for hurricane damage (not fully covered by insurance). Upon closer inspection, we noticed there was no end to this billing or reserve fund. Therefore, if a tenant moved out at the end of their lease term, they did not get their money refunded – even if there had been no hurricane damage. The money collected was simply for the landlord’s slush fund and could be used for whatever purpose the landlord pleased. So, look for these types of odd clauses and scrutinize them carefully – after all, it’s your money.
Communicating with your landlord both verbally and in writing about operating cost concerns is imperative.
Look at what you’re paying for. The majority of commercial lease agreements may stipulate the specific components of the operating costs that the tenants need to pay for. Typical examples of valid operating costs include general maintenance, painting, lawn-cutting, snow removal, property insurance, and so on. Almost every lease agreement has an operating cost clause in a short- or long-form manner. From a tanning salon tenant’s perspective, longer is better as it creates more certainty.
Understand how proportionate share counts. If a tanning salon tenant occupies seven percent of a commercial property, they can typically be required to pay their proportionate share – seven percent – of the operating costs as additional rent. But not all tenants use operating costs proportionately. For example, should you be paying for common lobby charges or elevator maintenance costs if you are located on the main floor of a building (and have office tenants leasing the entire second floor)? Have your proportionate share of the operating costs actually stated in your lease agreement (as a percentage number) and consider excluding costs that are not applicable to your tenancy. Don’t be afraid to question the operating costs and your proportionate share.
Cap the operating costs. In some cases, a slothful or cash-strapped landlord may have skimped on regular property maintenance. If the property is sold to a reasonable landlord, several years of deferred maintenance has to be caught up on at the expense of the current tenants. If you’re trying to budget costs for the year and consider your overhead rents important, you may want to negotiate a 5-10 percent cap on operating costs, so that your landlord can only raise them by that amount at a maximum annually. Note that the landlord may only be willing to cap controllable operating costs – meaning they won’t cap property taxes (or similar items beyond their management control). Any ceiling or restrictions that a tenant can put on rising operating costs will ultimately benefit the tenant.
Communicate with your landlord about operating cost concerns. Operating cost discrepancies come in two flavors: honest mistakes or dishonest calculations. In a building where the property is close to or fully occupied, the landlord may have less reason to try and profit from operating costs but may still try to enhance the property using the tenant’s money. Communicating both verbally and in writing about operating cost concerns is imperative. And don’t wait too long, because the lease may stipulate a statute of limitations on adjustments. If you catch your landlord with his hand in the cookie jar, don’t be surprised if he’s not communicative or cooperative.
