Time to Review Operating Expense Escalations

November 12, 2018

All tenants that lease space pay operating expenses and real estate taxes in addition to base rent. The way these expenses are paid varies depending on the structure of the lease. For example a full service lease will typically include a base year for calculation of expenses. Normally the base year will be the first calendar year of the lease term. The actual expenses for the building for that year form the base from which future escalations are calculated. A triple net lease is structured differently in that there is no base year and the actual expenses are passed on to the tenant. There are many specifics and nuances regarding this lease clause and I’ll leave that for another post.

The point of this post is to remind tenants that landlords are typically required to present a summary of the previous year’s actual expenses and a reconciliation with previous payments clearly showing any over or under payment. This normally occurs at the end of Q1 or beginning of Q2. Tenants will normally have a limited window defined in the lease in which they can review and possibly challenge the validity of the expenses. There are also many specifics and nuances associated with this lease clause.

What I’ve noticed over the years is that many tenants do not have a process in place to review and/or challenge operating expenses and just pay whatever amount the landlord is requesting. I have also seen many occurrences of unwarranted overcharges. Sometimes these overcharges are just accounting mistakes and unfortunately sometimes they are an overreach by the landlord. If a tenant does not review and question the calculation of landlord expenses within the defined window of time (typically 60 – 90 days) they have de facto accepted it.

As part of our normal service we routinely review operating expense statements for our clients and have been successful mitigating some of the increases. If you have any concerns about how operating expenses and real estate taxes are increasing for you company, please let us know and perhaps we can help.

Contact Jim, Sam or Ben to schedule a virtual or in-person meeting today.