A property owner decides what expenses get passed through to his or her tenants. Understandably, they want to get as high a return as possible on their investment. The following two methods can protect you from inappropriate pass-through expenses and save you big on your lease costs.
Ownership Expense Exclusions:
Most commercial leases say something to the effect that the landlord may pass through all expenses (or the expenses over a base year) related to the ownership, maintenance, and operation of the project. The costs of maintenance and operation may make sense to pass through to a tenant. Ownership costs are another story, however. These could include costs of refinancing, marketing the property for sale or lease, legal costs related to the ownership structure, accounting fees for ownership tax returns, income tax, and even executive salaries. Tenants should usually try to exclude ownership costs. It is wise to have a prepared list of specific items that are not allowable pass-through costs. Of course, read the details in your landlord’s lease documents. You might be surprised to find that he or she expects you to cover certain items. If it doesn’t make sense, don’t agree with it.
Annual Operating and Maintenance Expense Reconciliation Audits:
If you have excluded ownership costs to modify your lease, check that provisional changes have been notated. Be sure that negotiated caps or limits have been honored and ownership costs haven’t (mistakenly) been added. Do your due diligence! Know whether other items being charged are in line with the current market. Hire someone to do it for you if you don’t have the time or resources to audit the reconciliations yourself. Also, do it in the first year of your lease. This will establish with the landlord that you are paying attention. It demonstrates that you will not tolerate inappropriate charges. Besides, leases will commonly prevent you from challenging expenses or auditing prior years after a certain period. Insert language into the original lease that prohibits pass-through of ownership costs. And audit the operating and maintenance expense reconciliation to enforce your rights.
For additional information about lease language and audits, please refer to our blog post titled “6 Reasons to Audit Your Building’s Operating Expenses”.
Contact Ryan Hartsell with questions or assistance to purchase or lease commercial real estate in and around the Houston, Texas area.