It’s that time of year when your landlord sends you a letter reconciling the expenses from 2025. Over the past 10 plus years, it’s been an unwelcome correspondence since building operating expenses have been going up. The main driver of increased expenses is due to property values rising over 7% annually causing inflated property taxes. Since most leases are “NNN”, which stands for “triple net” expenses of property taxes, property insurance and common area maintenance, most tenants are affected.
First, look over your lease for specific language as to what your landlord can bill you. Typically, it’s all the operating expenses of a building except capital improvement items such as a roof replacement or leasing fees. In the event you negotiated a “cap” on controllable expenses, you might have been able to get the landlord to agree to cap controllable expenses such as property manager fees, landscaping, janitorial, etc. Unfortunately, the non-controllable expenses like taxes, utilities and insurance are the largest expenses and get passed thru 100%. More specifically, property taxes usually make up to 50% of your expense bill!
Each expense category has a typical rule of thumb; property taxes usually make up 35 to 50% of the operating expenses, utilities can make up 12-18%, janitorial 10-12%, management fees 4-5% and water/sewer around 2%. Many other items like landscaping, exterior maintenance, HVAC repair, security are under 1% each. What you shouldn’t see as a pass-thru expense are items such as leasing fees, tenant gifts, tenant build out costs, etc.
If you would like a review of your operating expenses, give me a call. With my 30 years experience in leasing commercial real estate, I can help in your review at no cost. I can be reached at 512-736-5933 or at oddo@toweratx.com.
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