By Ed Muna
Every year at this time, usually between March and June, landlords throughout the land present their tenants with the prior year’s Operating Expense Reconciliation. And while they take months to prepare these statements, the last thing they want is for the business owners and executives who receive them to spend time reviewing this all-important document. So what exactly is this reconciliation and why is it important to your business’ bottom line?
To help understand why this statement is important, it is worth giving a quick recap of how operating expenses in leases work. In addition to the base rent that is clearly stated and negotiated, tenants are burdened with their pro rata share of operating expenses. At the beginning of the year, usually between December and February, property owners provide tenants with a budget for the upcoming year and their estimated share. This amount will be collected monthly over the year. At the completion of the year, the landlords prepare reconciliations of what they had budgeted for the prior year and what the actual expenses ran.
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Unfortunately for tenants, most property owners have trouble living within their budgets, and when the reconciliation is prepared the tenant ends up owing more money. This could be the result of bad luck or poor management of expenses, but the bottom line is most of the overage will be paid by the tenants in the building. Of course, this is not something a property owner likes to publicize, so when the statements do arrive they are usually buried within the rent invoice or presented in a way that offers little detail. That’s by design. Operating expense statements are intentionally devoid of details because the last thing landlords want is to make it too easy for tenants to question their spending habits.
While most executives are too focused on growing their business to spend time poring over another document, there is real value in making the effort to review, analyze and question these charges if necessary. By spending a little time deciphering what your landlord is actually asking you to pay, you can potentially save tens of thousands of dollars.
How do you accomplish this? Begin by comparing the new reconciliation to last year’s statement. Do you notice any obvious increases? Look beyond what the landlord wants you to see, such as minimal increases in non-controllable costs like utilities, taxes and insurance. Did repairs & maintenance or payroll expenses increase significantly? This is a major red flag, as these items are well within the landlord’s control.
Of course, significant fluctuations and increases don’t mean an error has been made. The key is to determine if a disconnect exists between what the landlord charges you and what your lease allows. For this reason, your review will also require that you revisit the operating expense language in your lease.
If this sounds like an overwhelming project, it doesn’t have to be. Hughes Marino’s Lease Audit Division will perform a complimentary review of your lease and operating expenses to look for red flags. While many brokers may offer to review your lease, only Hughes Marino has invested the time and resources to build a division of experts dedicated to assisting businesses with identifying erroneous charges. The result has been over 6 million dollars in erroneous expenses identified for our clients over the past few years.
Ed Muna is a senior vice president of Hughes Marino, an award-winning California commercial real estate company specializing in tenant representation and building purchases with offices in San Diego, Orange County, Los Angeles, San Francisco and Silicon Valley. Ed heads Hughes Marino’s Lease Administration and Audit Service divisions and helps tenants address issues that arise during their occupancy. Contact Ed at 1-844-NO-CONFLICT or firstname.lastname@example.org to learn more.