Before you sign a commercial property lease, it’s important to understand what type of lease you’re signing, where your money will be going each month, and what’s included or not included in your rental rate.
Depending on the type of lease, the rental number you see may or may not include Operating Expense Pass Throughs (OPEX) and Common Area Maintenance (CAM) expenses. Calculating, estimating, and itemizing these two terms gives even the most veteran real estate brokers and advisors a headache.
Before you decide to sign a commercial lease, here are the basics you should know about Operating and Common Area Maintenance Expenses:
What’s the Difference?
You’ve probably heard these terms used in tandem with one another and interchangeably. While they aren’t the same thing, they certainly overlap.
Operating Costs are the overall costs associated with operating, maintaining, and repairing a property. Ultimately, all of these costs are passed on to the tenants. But in properties with multiple businesses, they are distributed proportionally by the square footage usage of each tenant.
Operating Costs include 3 main fees: Property/Real Estate Taxes, Insurance, and Common Area Maintenance Fees. While the first two components of operating costs usually cannot be negotiated, Common Area Maintenance Fees sometimes can be. Common Area Maintenance fees apply to the general maintenance of the building that benefits all tenants, such as:
• Management/administrative fees
• Contract services (janitorial, security)
• Building maintenance/repairs (hallways, elevators, public bathrooms)
• Parking lot maintenance (paving, treatments, cleaning)
Is It Included In My Rental Rate?
While there are many different types of commercial leases, all are either Gross or Net in some capacity. Whereas Net leases break up the base cost of rent, utilities, and property taxes, Gross leases give one rental rate that includes all operating expenses for the first year of occupancy, known as the “Base Year.” However, since operating costs are prone to fluctuating, so will this gross rental rate.
After each year is over, the landlord will provide the tenant with a Reconciliation and Estimate statement which details the costs of the past year and an estimate of the costs for the current year.
This is convenient for the tenant in that it’s all-inclusive, however, it can also be misleading and cause problems down the road if not interpreted properly. After the Base Year, it becomes very difficult to challenge any inaccuracies in the calculated operating costs, and they will likely compound for the duration of the lease term at an unpredictable rate and can cause the tenant to owe much more than they originally intended to pay on the lease.
While you may get an all-inclusive rental rate, it’s really just an estimate that’s prone to change over the duration of your lease—so it’s important to know what the estimate includes and scrutinize it for accuracy. The sooner, the better.
How Can I Be Smart About It?
Operating Costs (including Common Area Maintenance) should be spelled out in relatively specific terms in your lease. If they’re not, you can request more detail. Don’t hesitate to ask for more explanation on what costs are included and what costs are not and to ask for examples.
Typically, what you will pay in Operating Costs is forecasted at the beginning of the year by dividing your rented square footage by the gross leasable area of the building. So, what you pay this year is the estimate—but that isn’t what you’ll pay every year.
After your base year, it’s crucial to inspect and scrutinize your Reconciliation and Estimate statement. Tenants should always negotiate audit rights. Request the Operating Expense history from previous years and a forecast for the following year to compare and look for any inaccuracies or alarming discrepancies.
There are also exclusions, expense caps, and category protections you can request to have put in your lease before you sign it in the first place, and this is where a tenant advisor can be very helpful to you.
Every day of the year, Mazirow Commercial negotiates leases to protect and save tenants rent dollars on many lease terms. The landlord is fully informed about the terms of the market place, are you? Don’t go to the table alone, contact us today. We are the tenant advocate for the Greater Los Angeles and West Los Angeles Area, San Fernando Valley, Conejo Valley, Ventura County, Santa Monica, Glendale, and more.
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