It’s that time of year when your landlord sends you a letter reconciling the expenses from 2020. Over the past 8 to 10 years, it’s been an unwelcome correspondence. Mainly because operating expenses have been going up due to the typical inflationary items such as labor, material, utilities, etc. Also, if you live in Central Texas and more particularly Austin, property values have been growing at an average rate of 6.89% over the last 10 years; and upwards of 20% in 2020 alone. That means property taxes go up too.
Know what items for which the landlord can bill:
Look over your lease for specific language. Typically, the landlord can bill for all the operating expenses of a building except capital improvement items such as a roof replacement or things like 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 between 35 and 50% of your expense bill!
Know the timelines in your lease:
Leases typically provide a time period, 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 is to have previous years expenses to compare to see if any particular item goes up vs previous years. 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.
Know what typical expenses look like:
There are 2 types of operating expenses: controllable and uncontrollable. Controllable expenses are expenses the landlord can either do without in the normal course of operating the building, has flexibility on how often that particular item is done, or can bid out the work. These items include things like landscaping, janitorial, property management fees, window washing, parking lot maintenance, etc. Uncontrollable expenses include things the landlord has to pay every year and doesn’t have the ability to control (for the most part) how often the item is done or the level of service that must be performed such as property taxes, insurance, and utilities.
To get a feel for what your operating expenses should look like by category, and as a 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.
If you are still in that window of the review period for your operating expenses, give me a call. With my 29 years experience in leasing commercial real estate, I can help review your operating expenses at no cost. I can be reached at 512-735-5933 or firstname.lastname@example.org