Operating Costs
If you are leasing your commercial space, the beginning of the year is usually the time when your landlord will present you with an invoice for expenses – in addition to your base rent.
However, if you own your business home you may be able to take a few more dollars from your left pocket and move them into your right pocket by asking your tenant/occupant to pay for some stuff.
Let’s define a couple of key terms
Operating Expenses.
Typically defined as the costs of maintaining the commercial real estate in which you reside.
Lease form.
Forms of leases vary as widely but commonly are either net or gross. Meaning your base rent is net of the operating expenses – or in the case of a gross lease – your base rent includes operating expenses.
What expenses are included as operating expenses.
Biggest in this category are property taxes. Next, insurance on the property – which is different from the liability policy you carry for your business and contents. Finally, common area maintenance which is a broad category of expenses which can encompass mowing the grass, trimming the trees, sweeping the parking lot, disposing of the trash, exterior lights, property management, changing the air conditioner filters, and reserves for capital expenditures such as roof replacement. Treatment of these CAMs – as they are called – varies widely among owners. Simply, some may not bill for these until due whereas others may budget for them monthly.
What expenses are not included in operating expenses.
A major system replacement – such as a new roof or air conditioner – or, changes made to the exterior of the building – like new pavement or parking lot lighting – falls into a class known as capital expenditures. As noted above – some landlords budget for these through reserves while others bill their tenants when the changes occur. Please check your lease. Treatment of these costs should be outlined. Commonly – language allows your owner to bill you for portion of these expenses spread over time – but not a lump sum. Expenses related to accounting, mortgage interest, entity fees, and business licenses should not appear on your invoice.
If an ownership change occurred recently – property taxes will increase based upon the sales price. As a tenant – you generally shoulder this bump. Watch out for generalized expenses. Most leases allow for you to reasonably audit any expenses you’re asked to reimburse. If you don’t understand a line item or if your owner simply sends you a flat amount to pay – ask for back-up. Check to see if your lessor can require you to paint the exterior.
Finally, anticipate these costs when you negotiate your next lease or renewal. Simple things like asking for operating expense increases to be limited or moving a base year forward can save you a lot.
When in doubt talk to your commercial real estate agent (tenant’s rep) who can work with you and negotiate with the landlord on your behalf.