It’s that time of year when your landlord sends you a letter reconciling the expenses from 2021. Over the past nine plus years, it’s been an unwelcome correspondence. And more recently with supply chain issues and labor market shortages, building operating expenses have been going up across the board. Also, if you live in Central Texas and more particularly Austin, property values have been growing at an average rate of over 7% over the last 10 years. And upwards of 22% in 2021 alone. That means property taxes go up too. All of which passes through to you, whether you are on a NNN lease or have a base year expense stop.
Here are a few key items to look at:
Look over your lease for specific language for what the landlord can bill you. Typically, it’s all 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 through 100%. More specifically, property taxes usually make up between 35 and 50% of your expense bill!
Also, 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 is to compare previous years expenses to see if any line item goes up versus previous years. If the lease is silent on the period of time in which you can 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 during the normal course of operating the building and these expenses have flexibility on how often they are incurred and as such are the type of which the landlord can usually 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) 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 35-50% 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 30 years of experience in leasing commercial real estate, I can help in your review at no cost. I can be reached at 512-735-5933 or email@example.com