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Oops! Billing Mistakes Cause Unexpected Increases in Occupancy Costs

Be Prepared: Landlord Annual OPEX Reconciliation Statements Are Coming!

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5 Common Areas to Explore for Billing Errors & Overcharges

Ownership Expenses

Generally speaking, all operating expenses passed-through by the landlord should be directly associated with the maintenance and operation of the building. Unless a lease’s operating expenses inclusions specifically allow it, any cost related to building ownership – including landlord entity expenses, entertainment, marketing and tenant relations costs – should not be included in building operating expenses. A detailed combing of the landlord’s general ledger may uncover substantial ownership expenses that are not the leaseholder’s reimbursement obligation.

Grossing-Up

It is a fairly common practice for commercial office leases to contain a provision requiring the landlord to adjust (or “gross-up”) and pass-through actual building operating expenses in buildings which are not fully occupied. The gross-up will typically reflect expenses as if the building were 95% or 100% occupied. Grossing-up, however, can be a complex methodology that requires numerous calculations and no small amount of insight into how a building’s operating systems relate to expenses based on building occupancy. A detailed and expert review of the landlord’s gross-up assumptions and calculations can be the difference between lease term compliance and substantial overcharges.

Capital Expenditures

Many leases contain specific language that prohibit the landlord from passing through to the tenants costs associated with capital improvements beyond routine repairs and maintenance (R&M). Further, it is common in such terms that permissible R&M and/or capital projects which act to reduce current operating expenses should be amortized, or such costs might be equally spread across the perceived number of years of the projects useful life. Expert lease audits prove invaluable in determining when these lease terms are being met, or when a landlord’s amortization schedule does not comply with industry standards.

Parking Garage and Other Non-Office Areas

Many commercial buildings contain space that may not be considered common area per specific lease terms. Fitness centers, retail space, cafeterias and parking facilities may create expenses that should not be subsumed within building operating expenses if a tenant’s lease so designates and/or depending on the availability of such amenities to the tenant. A careful review of the landlord’s general ledger in these instances may catch the passing through of these types of impermissible expenses.

Tenant Reimbursements

Not all tenants are alike, and a tenant’s neighbor may require and create substantial unique services, above standard services, or overtime services charges. Again, a careful review of the landlord’s general ledger may identify numerous tenant-specific charges that should appropriately be billed outside of building operating expenses directly to that tenant. That same review may also identify whether or not the landlord is appropriately addressing tenant-specific expenses in the building’s operating expense pool(s).

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