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Readers of our new book, Negotiating Commercial Leases & Renewals FOR DUMMIES, will learn (in-part) that although most commercial real estate professionals may tell you that operating costs are not negotiable, there are aspects of these costs that can indeed be changed to the tenant’s favour. When it comes to operating costs (also known as Common Area Maintenance / CAM charges), the landlord wants to make sure that the tenants pay all these costs for the building. There’s nothing unusual about that. However, when The Lease Coach analyzes operating costs for groups of tenants in a building, we often find that the tenants are subsidizing capital improvements that the landlord is using to enhance or increase the building and/or property’s total value. If a formal lease document uses sufficient detail to define what constitutes an operating cost, then the tenant has a fighting chance to at least examine, question, and negotiate each listed item. We remember one Florida landlord who charged all of his tenants an annual fee to have a pool of money available for hurricane damage not fully covered by insurance. With being skeptical about this claim, we inspected closer and noticed there was no end to this billing or reserve fund ... tenants were required to pay it for the entire duration of their tenancy. If a tenant moved out at the end of their lease term, they did not receive any of the money back they had paid – even if there had been no hurricane damage. In this case, this landlord was simply creating a slush fund to do with as he pleased. With that said, look for odd clauses in your formal lease document and scrutinize them carefully – after all, it’s your money! Look at what you’re paying for. The majority of commercial, office, and retail lease agreements may stipulate that the specific components of the operating costs that the tenants need to pay for. Typical examples of operating costs include general property maintenance, painting, lawn cutting, snow removal, property insurance, and so on. Remember, a valid operating cost is one that will benefit all of the tenants in the commercial property – not just one or two. Almost every lease agreement an operating cost clause and typically defines these common area maintenance charges in a shortor long-form manner. From your perspective as an optometrist tenant, longer is better as it creates more certainty for you. Operating costs are charged proportionately to all tenants. If one tenant occupies seven percent of a commercial property, he/she can typically be required his/her proportionate share – 7% – of the operating costs as additional rent to the landlord. But consider for a moment that not all tenants use or consume operating costs proportionately. Would a convenience store or a bank contribute more to parking lot trash collection? Would a tenant on the first floor or the 20th floor of an office tower use the elevator more often? We remember one dry cleaner who felt it was unfair that he had to pay his proportionate share of trash removal. He claimed that he created only one bag of garbage each week – he happily put this bag in his van, took it home with him, and then set it outside for pickup with his own household garbage. Yet he was forced to pay his proportionate share of trash removal just like all of the other tenants. With ever-rising operating costs, you may wonder if it is possible to negotiate a cap on these expenses. Yes. In some cases, a slothful or cash-strapped landlord may have skimped on regular maintenance but after the property is sold to a more reasonable landlord several years’ of deferred maintenance has to be caught up on at the expense of the present tenants. If you are trying to budget costs for the year, and your overhead rents are important to you, you may want to negotiate a 5 – 10 percent cap on operating costs so that your landlord can only raise them that amount annually as a maximum. In response, your landlord may be willing to cap controllable operating costs – meaning that they won’t cap property taxes or other such items that are beyond their own management Dale Willerton is the founder of The Lease Coach and Jeff Grandfield recently joined him as partner. Dale and Jeff are commercial lease consultants who work exclusively for tenants, and are also professional speakers and co-authors of Negotiating Commercial Leases and Renewals FOR DUMMIES. Got a leasing question? Need help with your new lease or renewal?

Negotiating the Operating Costs as Rent