It’s that time of year when your landlord sends you a letter reconciling the expenses from 2024. 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 8% annually inflating property taxes to new heights. If you are on a NNN lease, which stands for “triple net” expenses of property taxes, property insurance and common area maintenance, most every building expense is passed thru to the tenant.
Here are a few key items to look at:
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- Look over your lease for specific language as to what the landlord can bill you for. Typically, its all the operating expenses of a building except capital improvement items such as a roof replacement or leasing fees. If you negotiated well on your lease, 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!
- Leases typically provide a period of time, usually 30 to 90 days, for you to review the operating expense reconciliation letter the landlord sends you. It’s always good to have a knowledge of approximately what expense items should cost. One way to get this number is to compare previous years expenses and see if any line item goes up year after year. If the lease is silent on a time period to respond, I recommend notifying the landlord that you are reviewing the operating expenses and give them a time frame of when you expect to finish your review.
- There are two types of operating expenses — controllable and uncontrollable. Controllable expenses are those the landlord pays to operate the property. These expenses have flexibility on frequency, and they can usually bid out the work. Examples of controllable expenses include: landscaping, janitorial, property management fees, window washing, parking lot maintenance, etc. Uncontrollable expenses are those the landlord is required to pay each year without the ability to control (for the most part) such as property taxes, insurance, and utilities.
To get a feel for what your operating expenses should look like, be sure to sort by category. As a rule of thumb, property taxes usually make up 35-50% of the operating expenses; utilities can make up 12-18%; janitorial 10-12%; management fees 4-5%; and water/sewer around 2%. Miscellaneous items like landscaping, exterior maintenance, HVAC repair, security should be under 1% each.
If you are still in that window of the review period for your operating expenses, feel free to give me a call. I have over 30 years of experience in commercial real estate and leasing and am happy to offer a no-cost review of your lease. I can be reached at 512-736-5933 or oddo@toweratx.com.
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