Negotiating the Operating Costs as Rent
As a franchise tenant, your monthly base rent you pay your landlord for leasing commercial space is not the only rent you may pay! Many commercial tenants will also pay their landlord a secondary amount for property operating costs. The good news is that both these rents are often quite negotiable.
To clarify, operating costs (also known as Common Area Maintenance and/or CAM charges) are the costs of maintaining and managing a property. Examples of valid operating costs include property taxes, property insurance, maintenance, utilities, landscaping (both lawn mowing and snow removal), and garbage collection. Valid operating costs will benefit all of the tenants in the commercial property – not just one or two. To avoid being taken advantage of, commercial tenants need to understand and remember that operating costs are charged proportionately to all tenants. A tenant occupying seven percent of a commercial property will, typically, pay seven percent of the total operating costs. Operating costs are certainly not, however, used equally. We remember one tenant who collected only one bag of garbage per week. He would happily load this bag into his own van, take it home, and place it outside with his own trash. Despite this, he was still obligated to pay his proportionate share of operating costs.
When a tenant does not cover the property’s operating costs, these become the responsibility of the landlord. To reduce these costs, the landlord will want to ensure that his tenants pay all the building costs. This is to be expected. What is wrong, however, is when all the commercial tenants within a commercial property are paying needlessly to subsidize capital improvements on the building. The Lease Coach often uncovers these discrepancies when analyzing operating costs for groups of tenants in a property.
The commercial property’s operating costs need to be completely spelled out in a tenant’s lease agreement. When this occurs, a tenant can examine, question, and negotiate each listed item. Beware that commercial landlords can be quite creative when it comes to listing operating costs … we remember one Florida landlord who charged all of his tenants an annual fee to have a pool of money available for hurricane damage not fully covered by insurance. This seemed unusual to us so we dug into this matter further and noticed that this landlord’s tenants were required to pay this fee for the entire duration of their tenancy. If no hurricane damage had occurred during tenancy and a tenant relocated, the money that he/she paid into the pool was not refunded.
When a building is fully occupied (or close to fully occupied), the landlord may be less motivated to try to charge his tenants an extra amount. That doesn’t always stop the landlord from trying to enhance the property with the tenant’s money. In the case of a commercial property with a number of vacancies, the landlord may try to reduce paying his proportionate share of operating costs. In this case, tenants should be specifically mindful of lease agreement language – this may detail the operating costs due but it can also be complex. We have seen lease agreements which explain that operating costs for a property’s vacant units are to be paid by the current tenants – over what is expected.
When it comes to reading operating costs, read carefully! These are among the many potentially detrimental issues which can negatively affect tenants:
Administration Fees: If tenants are paying the property manager’s salary through operating costs, but the landlord adds a 15 percent administration fee to CAM costs, this can be considered double-dipping (or double-billing for essentially the same service). If the landlord levies administration fees on property taxes and/or insurance, note that can also be defined in the same manner as there is very little landlord’s administrative work involved with these.
Utilities: Electricity, natural gas, and water may be provided by the landlord or separately metered for each tenant. In some cases, the landlord may have one meter on the property and a check meter on each tenant’s unit to measure consumption. If you’re paying your own utilities to the utility company you’ll have your own meter. Often, the landlord bills back utilities to tenants in operating costs. Make sure that you know in advance what the lease agreement calls for so you don’t pay twice.
Tenant Audit Rights: The landlord has a fiduciary responsibility for accountability to the tenants for the money collected from and spent on behalf of the tenants. The lease should include tenant audit rights which allow you the opportunity to examine the landlord’s books, if necessary.
Dale Willerton and Jeff Grandfield - The Lease Coach are Commercial Lease Consultants who work exclusively for tenants. Dale and Jeff are professional speakers and co-authors of Negotiating Commercial Leases & Renewals FOR DUMMIES Wiley, 2013). Got a leasing question? Need help with your new lease or renewal? Call 1-800-738-9202, e-mail DaleWillerton@TheLeaseCoach.com or visit www.TheLeaseCoach.com.