How Does My Lease Affect My Occupancy Costs?

Aside from rent, operating expenses are likely the largest contributor to your total occupancy cost. This holds true, no matter what type of commercial lease you may have – full service, net, triple net, etc. What does change between these varying lease types, however, are who your paying and how you pay for those operating expenses. You may think to yourself, “if I’m paying for the same thing anyway, what’s the difference?” Something you may not realize is that “who” and “how” can greatly affect the “what” (how much) very easily.

The three most common ways tenants will cover their operating expenses include:

Separately negotiated contract with service providers

In the case of the outside contract (e.g. company-hired cleaning service), assuming your service providers are straight shooters, you don’t have much to worry about in regards to overpaying. You should have a clear description of your charges, and any disputes you have can be taken up directly with the provider.

“Additional Rent” as part of a net lease

In a net lease situation, wherein you are paying a base rent plus, what is often referred to as “additional rent,” which will serve as a separate payment for operating expenses. A breakdown of the specific expenses should be provided in the lease. Here, you know exactly how much of your money is (supposed to be) going toward the operating expenses for which you are responsible.

In a multitenant property, the building’s operating expenses are prorated and passed through based on one of two things – your proportion of the buildings rentable square footage as a percentage (your pro rata share) or your proportion of the buildings total occupied space at the time of lease execution. The latter is undesirable to say the least.

If you occupy 10% of a building with 50% vacancy, your pro rata share just went from the 10% of the building you actually occupy to the 20% of the 50% of the building that is occupied. As is the message with everything that we do at REoptimizer, pay what is fair, and not a dollar more.

Full service lease with included operating expenses

A full service lease exposes the tenant to the greatest risk of landlord abuse. The full service lease typically has a base year operating expense included in the rent. From that base year, tenants are exposed to the risk of rent escalations outpacing inflation and actual increases to the landlords’ expenses.

Some more problem landlords have also been known to pass through unrelated costs to tenants as operating expenses. These include things like increases in the landlord’s staff, or increases in their own share of the operating costs.

Another cost that may go unchecked over the lease term is changes to rentable square feet. Let’s say you are in a ten-year lease, and three years in, some of the common area (perhaps the lobby) is converted into rentable space. Your pro rata share of the rentable square feet should be adjusted to reflect the increase in rentable square feet and the fact that your occupied space is now of smaller proportion to the rentable area of the building. Landlords will never bring up the fact that tenants are overpaying. So it is up to the tenant to make sure that those prorated total costs are true and accurate. Much can be saved and even recouped by simply paying attention.