1. “Disaster Years” as Base Years
Using a base year to calculate operating expenses is simple. First, establish how much it costs to operate a property in a specified year – the base year. In subsequent years, the tenant pays its pro rata share of operating costs in excess of the base year’s costs. Got it? Great! In my neck of the woods, Houston’s suffered two straight years of disasters: the 2016 Tax
Day Floods and Hurricane Harvey in 2017. If a tenant is “slick” enough to use one of them as a base year and the landlord had high expenses restoring the property, expenses may never be recovered from that tenant. One of my largest tenants was a global oilfield services firm occupying multiple full floors. During renewal negotiations, they’d slipped a disaster year past the landlord and leasing director. They didn’t pay an OpEx bill for years! Here’s a tip: If a disaster happens after a base year has been selected, build in a clause allowing for expense recovery utilizing a different year.
2. Casualty Clause in a Firebug’s Favor
Many moons ago, I managed a 13-property portfolio with a mixture of office, retail, and industrial sites. What no one told me during the interview was that nearly 25% of a retail site had just been destroyed by fire. Thanks! A karaoke bar was the origin of the blaze, which fire marshals deemed “incendiary.” This lead to further investigation into the tenant’s culpability and infuriated the property owner, who didn’t want to lease to the same tenant after restoration. But guess what? The lease forced the landlord to give the “fire bug” the right of first refusal to occupy the suite. Needless to say, the landlord quickly had all of his leases re-written. The lesson? A quarterly lease review should be standard operating procedure.
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MANAGING COMMERCIAL PROPERTIES (CML201)(link is external)
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Marketing & Leasing Strategies for Retail Properties (MKL404)(link is external)
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Budgeting, Cash Flow, and Reporting for Investment Real Estate (FIN402)(link is external)
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3. Team Tenant vs Team Landlord
On the residential side of real estate, the proper and legal way to conduct an intermediary transaction is drilled into our psyches. (re: We’re petrified of landing in mediation, arbitration, or litigation for misrepresentation!) Residential practitioners are very clear on how to request permission from clients to enter into intermediary and how to assign agents and conduct proper communications. Things aren’t so prevalent on the commercial side where it’s not uncommon to discover an assumed intermediary status buried in the final clauses of a lease. This is an expensive lesson if an unaware broker representing a tenant ends up with no commission after working for weeks. Moreover, landlords and property managers can find themselves in a precarious position by attempting to walk both sides of the line. The best bet? If you’re unsure about how to be an intermediary, pick a side!
4. OT HVAC Is a Hot Button Issue
Boy, oh boy! I have seen it all when it comes to OT, or after-hours, HVAC billing. I’ve seen tenants get reamed with unjustifiable hourly rates as high as $65 in a C-class building. In this scenario, the tenant used after-hours air for an additional three hours per day, Monday through Friday, costing nearly $47,000 annually – comparable to one full year of rent. This became a major sticking point during renewal negotiations. Conversely, I’ve seen landlords miss a billing opportunity because multiple tenants on the same floor are riding on another tenant’s OT HVAC request. The solution? Ask housekeeping to report which tenants are in their suites after hours on a regular basis. They’ll be more than happy to share as these are generally the tenants who ask them to come back and finish later.
5. Learn the ABCs of CPI
Expense Reimbursement CPI calculations can be uber complicated and landlords can lose thousands if performed incorrectly. Midway through my career, upon starting a new job at a REIT, I was handed a binder containing two-inches of documents. My boss gave me one directive: “Get our money back.” I’d acquired yet another nightmare situation. This time, a non-GSA, local government tenant owed the landlord nearly $90,000 in CPI-based expense reimbursements spanning several years. The problem? No one at the company understood how to use Cost of Living indexes and appropriate formulas to calculate proper billing amounts. After revamping early miscalculations, and several commissioners court meetings later, we successfully recaptured $86,000. Ownership also learned a valuable lesson. Let’s just say the landlord was no longer impressed by a 15-year lease that recovered virtually no expenses.
By: NAR
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