Why Are My Operating Expenses Increasing Exponentially Every Year?

Why Are My Operating Expenses Increasing Exponentially Every Year?

The simple answer is some landlords employ spending strategies to pass operating expenses to tenants to lower the operating expense base year.

If you are renewing an existing lease, expanding, relocating to a new building or opening a new office you must consider the following during the proposal and/or lease negotiations.

Artificially Low Base Year

  • The dynamics of occupancy and vacancy may drive landlords to artificially establish a low base year.
  • Landlords may accelerate building work in a year when a large amount of space is vacated in order to reduce expenses the following year to establish a lower base year for new tenants.
  • A landlord may defer maintenance in a year in which a large amount of space is being renewed and/or when vacant space is leased, thereby establishing a lower base year.

Historical Expenses

  • Request at least three years of detailed historical operating expenses and real estate taxes by line item.
  • Determine upward or downward trends of controllable & uncontrollable operating expenses by line item.
  • Negotiate caps on increases in controllable operating expenses.

Definitions for Operating Expenses and Capital Expenditures

  • Sound simple? The list of operating expenses should include just that, operating expenses, not capital.
  • A comprehensive list of capital expenditure exclusions should prevent the landlord from using the lease against a tenant to pass through capital costs.
  • Negotiate the right to audit the landlord’s books and records.

Contact us to learn more about how to negotiate the base year or when you need a broker to represent you in your next lease negotiation.