While you, the Tenant, may be excited that your Landlord has thrown a shindig just for you and your commercial neighbors to express their appreciation for your loyalty, don’t thank your Landlord just yet. More often than not, the cost of throwing a “Tenant Appreciation” event is hidden within the operational costs you agreed to pay each month.
Don’t let Landlords distract you with perks that you’ll end up paying for anyway. Instead, keep reading to educate yourself on Operating Expense and Reconciliation clauses to ensure you’re getting a fair deal.
What are operational costs and Operating Expense Pass Throughs (OPEX)?
A portion of your rent includes reimbursements paid to your landlord for your share of a building’s operating expenses, which typically include property taxes, insurance, maintenance, utilities, and other day-to-day expenses.
These costs may vary over time, which is why commercial office leases typically require Tenants to pay Operating Expense Pass Throughs (OPEX) and/or Common Area Maintenance (CAM) costs annually. Operating costs are based on estimates made at the beginning of each year, not actual usage. Landlords will review their bills at the end of each year and make a prediction as to what their operating expenses will be the following year, passing the expense to the tenants in the form of increased rents.
Landlords are required to provide Tenants with a reconciliation – basically, an adjustment to rent – at the end of each year, which reflects the cost to operate the building that year against what the Tenant paid during the previous twelve months. Reconciliations are generally estimated comparing expectations against the “Base Year” cost, or the operational cost of the building for year one of the lease, and are “passed through” to Tenants according to the proportion (pro rata) of space they occupy in the building. It is essential Tenants request their Base Year cost from the Landlord to accurately compare future billing from the landlord.
All this seems pretty straightforward; however, Pass Throughs are calculated after you sign the lease, meaning you could get hit with unexpected costs if you did not negotiate the terms of your contract. You might be required to reimburse landlords for operating costs, but, likewise, landlords must reimburse tenants if their estimates are too high. Reviewing the expense clause of your lease will also ensure refunds are accurate and completed in a timely manner.
What should the operating expenses clause in your lease include?
At a minimum, the lease should require that the Landlord provide the following items:
-A reconciliation statement of Operating Expense in reasonable detail, within a defined time, such as 60 days after the end of the year.
-The Landlord’s calculation of a Tenants proportionate share of Operating Expense costs to ensure a Tenants’ share isn’t larger than it should be.
-A defined time period for a refund of any overpayment of Operating Expenses that a Tenant paid during that year, such as 30 days from the end of the prior year.
-The Tenants right to review copies of any relevant backup materials, such as contracts, correspondence, and paid invoices confirming cost.
-An outline of what may and may not be passed through to a Tenant as an Operating Expense – this is essential!
These contractual conditions will enable you to accurately assess whether you’ve been overcharged or undercharged, limit the impact of operational expenses on your budget, and ensure charges for operational costs are in accordance with the lease – no surprises.
Want to guarantee you won’t be hit with surprise charges? 365 days a year Mazirow Commercial negotiates leases to protect and save Tenants rent dollars on many lease terms, one of the largest items being the Operating Expense and Reconciliation clauses of the lease. The Landlord is fully informed as to the terms of the market place, are you? Don’t go to the table alone, contact us today. We are the tenant advocate.
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