Common Area Maintenance Charges and/or Building Operating Expenses (BOE) can be a surprise cost to many tenants. Too often while negotiating leases the focus is on the base rent rather than the total cost of occupancy which may include:
Tenant improvements costs (or amortized overage)
Projected after hour HVAC use
BOE’s over a Base Year or Expense Stop
What are BOE’s and why do you have to pay them? They are often the most overlooked item. Those unexpected costs can become 3% or more on top of your contract base rental rate increase.
At IN/House we educate our clients about this extra charge by using our chocolate bar analogy.
Basically, those 16 squares (Part A) are the costs the landlord incurs related to mortgage, legal fees, marketing, and other costs. The remaining 8 squares (Part B) represent taxes, maintenance, insurance and utilities for the building. This is typically spelled out in the Lease under “Additional Rent.”
Now for a working example. Let’s assume your rent is $2/RSF/Mo. Of that, $1.50 goes to Part A, while $.50 goes to Part B. If your rent goes up to $2.05/SF/month in year two and the BOE’s go up $.03/sf/month then your actual payment is not $2.05/SF but instead, $2.08/SF.
Here are the nuts and bolts:
Your office lease will either state you have a Base Year or an Expense Stop. We will address only Base Years. To further our example, let’s assume for simplicity you started your lease in January 2017.The Lease will state you have a 2017 Base Year.
In December 2017, you will get a statement from the Landlord outlining the projected costs for 2018 along with a projected amount you are to pay each month in addition to the base rent which covers any projected overage. In March 2018, you would receive a statement showing the actual 2017 BOE’s thus establishing your Base Year expenses. Since you had no BOE’s in the first year as they are included in your Base Rent, there will be no additional charges for 2017.
The process repeats itself in December 2018 except this time you have an established Base Year so the projections for 2019 will reflect the difference between the Base Year BOE’s and the projected 2019 costs.
As before, your March statement bill will show the delta between the actual cost for 2018 and the actual costs for the base year 2017.
Stay with us now.
Remember when the landlord billed you for a “projected” 2018 cost? Let’s say that was $150/mo. or $1,800 for the year. If the March Reconciliations’ Statement notes the actual costs were lower, you will receive a credit for the delta. If it is more, you must pay the difference. Both calculations are based on the percentage of the building you occupy.
Some things to watch out for.
First, if the landlord doesn’t provide a line item report with the statement, ask for one. You should see at least 10-12 cost items including but not limited to:
Next, check to be sure the statement has the correct building size, suite size and percentage as well as the correct Base Year amount. We then compare the actual costs for each year as compared to the previous year and calculate the percentage difference. If we see a red flag, items that increased more than a normal range, we question the landlord on that.
This year we found some error in EVERY statement we reviewed. Some were math errors while others had significant lease issues attached. In most all cases, the landlord corrected the errors and proper
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credit was given while others are being reviewed by counsel.
This certainly leads to the next question, is it worthwhile to have a full audit done on the BOE’s, or can you negotiate items in the Lease to limit exposure?” That will be the subject of another BLOG.
If you have any questions, please feel free to email us at email@example.com.