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How to Reduce Office Space Lease-Related Business Expenses.

As a result of pro-landlord lease language, miscalculation of additional rent items; i.e., operating expense escalations, service billings, and a lack of adequate document and billing verification by the tenant, many commercial real estate tenants are being overcharged by many landlords. Over the term of a lease, these overcharges can cost a tenant tens of thousands of dollars. There are, literally, hundreds of ways that a tenant can be overcharged; ironically, in many cases, this is in full accordance with the lease document. The purpose of this article is to explain to you, both as commercial real estate tenants and as consultants to tenants, what to look for when analyzing landlord billings and how to best reduce and control office space related expenses.

1) Overtime A/C and heating charges--Many landlords will bill you for overtime A/C and heating usage without ever providing adequate backup for the bill. For example: The A/C rate is $35 per hour x 4 hrs. = $140.00. You must make the landlord verify the $35. Inmost buildings, the electricity consumed by the equipment is the most expensive component of the $35. Therefore, you must ask the landlord to provide you with the actual formula used in the overtime A/C calculation; i.e., the equipment list, the power ratings of each piece of equipment and the cost per kWhr used. Many landlords will use the building average rate per kWhr in the calculation. This rate is too high--it usually contains a demand charge that can represent as much as 40 percent of the cost. The demand charge, in most buildings, is incurred during the peak operating hours, usually 10:00 a.m. -- 3:00 p.m. In most buildings, there is no demand charge incurred by the building after normal operating hours. Also, make sure that the equipment power consumption is not rated at full load conditions. After hours, the equipment usually operates at a fraction of its capacity. Always get the actual overtime A/C calculation be fore you pay the bill.

2) Subsidizing other tenants' operations-- An often-overlooked area of overcharge deals with other tenant operations and the lease concessions that they have received from the landlord. Many buildings have one or two major/anchor tenants. Landlords are notorious for granting numerous lease operating concessions to these anchor tenants; i.e., additional hours of operation, additional security, additional cleaning services, etc. Who is paying for the additional utilities consumed and the other bills related to these additional services and operating hours? If you don't look for them in the operating escalation billing totals or if you don't do the proper investigation, you or your clients may very well be!

To verify if this is going on is not difficult.

a) Ask to review the building's after hours utility meter reading logs for both electricity and water. If the readings are high, it means that equipment is running after hours. Either some tenant or tenants are working after hours or the building is being run inefficiently. In either case, you or your client should not be paying for any part of the related expenses for the utilities or additional labor required to keep the building open after hours.

b) Visit the property after normal operating hours. If you see too many lights on or too much activity around the building, ask the landlord what is going on. The landlord will be hard pressed not to give you an answer.

3) Operating expense escalations--Almost every lease contains some form of operating expense escalations; i.e., actual expenses, expense stops, gross-ups, etc. Never pay the operating expense bill without requesting and obtaining adequate backup documentation necessary to justify the bill. Never accept the annual billing summary of accounts as the final word. In most cases, these accounts are too general. Too many sub-categories are included in them. You need to review the monthly operating statements and the complete building chart of accounts. Always closely review the general building repair and maintenance, miscellaneous and general administrative accounts. Many expenses can get "lost and incorrectly allocated" to these accounts; i.e., leasing expenses, small capital items, etc. You must keep your eyes open to catch these errors.

Some items you should look for are bills to correct landlord negligence, bills for other tenant services, small capital items such as small pumps and motors, tenant entertainment expenses, etc. They add up. If your lease has a gross-up escalation clause, make sure that the base year expenses are also grossed up. Some landlords only gross-up the subsequent operating year's expenses, resulting in a windfall profit. Always ask the landlord to verify the base year expense totals. Some landlords use unrealistically low base year totals that will result in you or your client paying too much in future escalation billing payments.

Ed Eriksen, Principal of the Tenant Advocate Group is a 30-year property management professional, a speaker and has just completed the book-The Tenants' Guidebook to Commercial Real Estate -- What You Need to Know.
COPYRIGHT 2001 National Society of Public Accountants
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2001 Gale, Cengage Learning. All rights reserved.

Article Details
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Title Annotation:tenant information and techniques
Author:Eriksen, Ed
Publication:The National Public Accountant
Article Type:Brief Article
Geographic Code:1USA
Date:Aug 1, 2001
Previous Article:Reentering the Job Market.

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