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Let the Tenant Beware

Office tenants in some downtown San Diego buildings are, in effect, getting more than they bargained for in their mail these days.

A good number of tenants with two years and more left on their leases are receiving — unsolicited, of course — extension of lease proposals with verbiage that suggests if they renew right now the landlord will generously reset the operating expense Base Year to calendar year 2002. This, the spiel goes, will save the tenant much in the way of operating expense passthroughs.

By way of explanation, operating expenses for these buildings are typically passed through to the tenants — in addition to rent above a certain level that is determined in the lease which is normally referred to as the “base year.”

One pitch I’ve come across in a letter given to me goes something like this:

“This change in the Base Year has a significant impact on your rent as your existing Operating Allowance is $9.87 per rentable square foot and the 2001 Base Year Expenses are projected to be $11.64 per rentable square foot. This would equate to an additional $1.77 per rentable square foot per year or 15 cents per square foot per month. It can be anticipated that the Base Year expenses for 2002 will be even greater than those projected for the Base Year 2001. Renewing now under this offer would effectively reduce your rent for the remaining three years of your existing lease term …”

Let me depart from my typical persona and be quite blunt: No tenant should bite at this hook. It is misleading and, I personally believe, it borders on misrepresentation.

Any building with operating expenses at $11.64 per rentable square foot is well above the norm. In fact, well, well above it. Second, the suggestion that anticipated 2002 expenses will be even greater is misleading.

Building operating expenses are budgeted nearly a year in advance of the actual year. The budgeted expenses are based on factors at that time — for example, skyrocketing electricity charges, janitor strikes, etc. However, “budgeted” and “actual” expenses are quite different numbers. For example, one downtown high-rise building manager budgeted $1.6 million for utilities for 2001 and it appears the actual number will be closer to $950,000. The budgeted number is 65 percent higher than the actual amount.

Most of such over-charges are occurring as a result of estimating that utility charges would continue to average 21 to 25 cents per kilowatt hour which, in reality, are capped at 6.5 cents.

Keep in mind two things: This capped kilowatt charge is retroactive to last Feb. 7 and building owners should be getting refunds from overcharges from the utility companies in the next 30 days. Tenants, therefore, will be getting their shares of refunds in the near-term future.

What the landlord’s representatives in these letters are not telling their tenants is that a portion of the 15-cent overcharge mentioned earlier will be refunded to the tenant in the first quarter of next year. The actual expenses will then be calculated and undoubtedly end up half of what was budgeted. The suggestion that tenants will save money by renewing earlier than they otherwise would is, to put it mildly, pure nonsense.

I’m not as upset over the fact that property managers would forecast exorbitant expenses or that there are differences between budgeted and actual expenses as I am to discover that landlords and their brokers are trying to manipulate their customers to commit themselves when it isn’t necessary. Worse yet, they are using misleading and outright false information to do so. Actual expenses — not those that are anticipated or “budgeted” — should be the influencing factors, not letters that are intended to scare tenants into extending their leases based on factors that will never come to pass.

In an earlier column sometime back, I likened the task of exposing tenant-abuse on the part of some landlords and their agents to trying to paint the Golden Gate Bridge. It seems an unending and perpetual effort. This particular offer smacks of added credibility because it’s the common perception among some tenants that we’re dealing with soaring utilities and other costs. And isn’t it reasonable that we can save costs in the future by taking action now?

Not in this instance. This early renewal offer is yet another of many examples in which building managers and landlord brokers are trying to take advantage of tenants.

Jason Hughes is founder of Hughes Marino, an award-winning commercial real estate company with offices across the nation. A pioneer in the field of tenant representation, Jason has exclusively represented tenants and buyers for more than 30 years. Contact Jason at 1-844-662-6635 or jason@hughesmarino.com to learn more.



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