Commercial Real Estate Sections

Office Tenants Risk Overcharges

Understanding the Fine Print Can Save Your Company Money

Paul Kinney

Paul Kinney

Office tenants are at risk of wasteful and inflated overcharges on their rents.

This business warning was issued by the National Retail Tenants Assoc. (NRTA) as the organization unveiled a new education program for office-property administration professionals, including many in the Western Mass. area.

The program included a presentation made to the organization by Rick Burke, a leading lease-administration professional and NRTA member. He noted that many office tenants in the Greater St. Louis region and beyond oversee their real-estate portfolios very informally without a designated lease-administration department or a trained person to review landlord billings. In fact, they often just pay what is billed by the landlord without any review, basically throwing money away.

So often we hear office tenants ask, “should I be asking my landlord for all the invoices to verify our operating cost?” or “we want to start a lease administration department; who do we hire, and how do we train them? ”

For the past 17 years, the NRTA has provided education programs designed to help retail real-estate professionals improve their lease-administration skills. Now, the NRTA has expanded its reach to office tenants seeking lease-administration training in order to answer these types of questions.

The NRTA advises office tenants to seek out lease-administration training in order to answer these types of questions. One such resource is an annual conference hosted by the NRTA. This three-day event typically attracts upwards of 500 professionals representing the leading retail and office tenants from across the nation. NRTA classes focus on lease-administration best practices and cost-recovery skills relating to common-area maintenance expenses and overall occupancy cost.

Today’s business environment mandates that an office tenant with multiple office locations must put a process into place to safeguard critical lease information and review all landlord billings for overcharges. It is essential for larger portfolio tenants to have a lease-administration software system, so information such as rent amounts, option notices, and operating-expense exclusions is readily available. A single mistake in any one of these areas can prove very costly to the tenant, often without them ever knowing it.

For example, during a recent audit for an office tenant, auditors found the landlord was overbilling for parking-garage expenses that were not included per the lease. The tenant was paying on a per-space basis outside of the lease as well as paying for all the cost of the parking garage through the operating expenses. The dollar-for-dollar savings to the tenant was $150,000.

Another recent audit compared base-year expenses with the current-year expenses. It identified many accounts that were not in the base year that were being billed in the current year. The landlord included management and other salary accounts not in the base year, thus overstating the current-year expenses in comparison to the base year. This allowed the tenant to reduce the current-year operating expense as well as recover amounts for the three prior years of operating expenses totaling $220,000.

A common expense that is frequently an overcharge to the tenant is real-estate taxes. Much like the review of taxes in retail audits, office and industrial tenants find themselves paying for real-estate tax parcels that are not defined as part of the building or property. The parcel could include a building or land that the landlord owns next to the office building, or perhaps it could be for undeveloped land that the landlord has slated to build on in the future, or an abated assessed value that did not get passed through to the tenant. These types of overcharges are not uncommon and, if identified, will reduce the tenant current and future operating cost.

Large overcharges to tenants can occur when calculating the ‘gross-up’ lease clause. The gross-up is the method of increasing operating expenses for a non-fully occupied building to represent a fully occupied building. How the gross-up is applied to fixed and variable expense accounts and how it is applied to the base year could result in a significant overcharge to the tenant.

Other areas where landlord overcharges loom are in management fees, overtime HVAC, pro-rata-share allocation, and capital expenses. Unless the reviewer is trained to understand these issues, the overbilled amounts can continue undetected.

This year’s NRTA annual conference is at the Renaissance Hotel at Sea World in Orlando. Its education program features 52 lease-administration classes and 17 small-group discussions in which practitioners are able to meet with people having similar challenges.

Classroom presentations are organized into six tracks: lease administration, occupancy cost, office leases, real estate, legal, and professional development.

Office-tenant courses cover topics such as “Understanding Operating Expenses,” “Reviewing and Auditing Operating Expenses,” “Negotiating an Office Lease,” “Understanding Mixed Use Cost,” and “Global Issues in Lease Administration.” Office tenants explore best practices designed to safeguard lease information, help them be more efficient, and save their company money. Companies such as Lease Administration Solutions, Cresa Partners, Cassidy Turley, and Fresenius Medical Care are among the presenters for the office classes.

For more information on the conference and membership, visit the conference page on NRTA’s website, www.retailtenants.org.

 

Paul Kinney is executive director of the National Retail Tenants Assoc.; (413) 525-4565; [email protected]

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