Saving Money Through Facility Audits
How exactly are occupancy costs defined?
Too often, tenants focus only on the base rent they pay each month. While that is a good place to start when calculating your cost to occupy a leased (or even owned) property, it is only the start. If you are in a NNN or MG lease, you know you have to add in some portion of the direct cost of taxes, maintenance, or insurance (sometimes grouped together as a Common Area Maintenance or “CAM" cost). Tenants who occupy space on a Full Service Gross basis rarely look at additional costs they may incur during their tenancy—costs that go beyond the base rate printed on the first page of the lease. To be more specific and to calculate your real "controllable" occupancy costs, you must separate out all costs that are directly related to occupying the space you are in. Do not include business costs such as copies, cabling equipment costs, or other similar expenses. Do include rent, parking, or anything else that might appear on the landlord's monthly statement.
What it does it cost a landlord?
Often, you will see the phrase "base year" inserted in a lease in reference to additional charges the landlord may collect during the term. To better understand this phrase, let's go back a step and look at what makes up your base rent. Stay with us on this—the landlord invested a certain amount of cash as a down payment to build or buy the building. Like a home, the rest is mortgaged out to a bank or other lending institution to which he pays interest and principle. He must also pay the taxes on the property, the cost to maintain and insure the building, plus a fair return on investment. Your base rent is calculated on that cash flow.
It's not the good old days.
Years ago, in many parts of the country, landlords signed leases for specific terms at fixed rates. Back then, they calculated their costs over the term and came up with a flat rate to charge. That all changed with the introduction of the Consumer Price Index (CPI). CPI gave the landlords an excuse to bump up the rent each year. They could justify the increase by saying the cost of goods and services was going up every year, so they could no longer afford to charge a flat rate for rent. After all, the government’s price index said the price of these external goods was increasing. Why is it then that your rent not only goes up, but that you also get hit with "additional rent”? The plot thickens.
Each year around March or April, you should be getting a statement from your landlord reconciling the previous year’s operating expenses. Be sure to read it carefully. If you’re not sure about what the numbers mean, call your broker. Most of the time, he will help. If you’re facing a complex problem, try a lease audit specialist. You might be surprised what you find out—and how much you may save.