I recently read a good article from Avogroup the other day regarding two ways to protect yourself on operating expense pass throughs from your landlord.  On this episode we discuss these two ways in detail.  As always, let’s start with a definition:  what are operating expenses?  They are the monies required to run a commercial building.  They can include common area maintenance, security, electricity, taxes, insurance, etc.  The landlord pays those fees and then turns around, divies them up among the tenants and bills each one their prorata share.  The two avenues of protection for tenants are:

  1. Always nail down your tenants’ responsibilities when the lease is written.  This requires a very thorough examination of just how the operating expense portion of the lease is written.  You want to make sure that the costs that are actually passed through to the tenant reflect maintenance and operation NOT ownership.  Ownership could involve refinancing, marketing the property for sale or lease, legal costs, accounting fees, etc.
  2. Audit, audit, audit-early and often, ha!  Make sure the lease states that you have the right to audit the landlords’ books prior to paying any additional expenses.  And then do it!  By starting off your leasing relationship this way it basically puts the landlord on notice that you will be looking over their shoulder and things had better line up!  Also, some leases will prevent you from auditing the books after a certain period of time so make sure you handle this in a timely fashion.

Here at REATA we always are happy to review our clients’ expense reconciliations.  We have caught mistakes and saved our clients money-always helps to have an extra set of eyes on the reports.  I usually don’t think the management company has evil intentions, they are just either not careful and not as familiar with the lease as they should be.  That’s where we come in!

Bob Gibbons is a Real Estate Advisor & Tenant Advocate (also known as a tenant rep) with REATA Commercial Realty, Inc. which is a tenant advisory firm based in Plano, Texas. Bob serves companies in Plano, Frisco, McKinney, Allen, Richardson, Addison, Dallas and the surrounding areas and specializes in companies which lease or buy office and warehouse properties.