Many commercial real estate tenants are being overcharged as a result of pro-landlord lease language, miscalculation of additional rent items such as operating expense escalations and service billings, and a lack of adequate document and billing verification by the tenant.
As a business owner and executive, you should be aware that these overcharges can, and often do, cost you tens of thousands of dollars over the term of your office space lease. There are hundreds of ways you can be overcharged, ironically, in full accordance with your lease document.
Here are three areas where overcharges can easily occur, and steps you can take to reduce your office space lease-related business expenses and exposure to billing abuse.
1. Operating expense escalation billings
Almost every lease contains an operating expense escalation clause, which allows the landlord to recoup from the tenant increases in expenses to operate the building. This is over the amount of expenses to operate the building in an agreed-to base year.
Never pay the operating expense escalation bill without getting back-up documentation (a statement of accounts or monthly operating statements) from the landlord to justify the bill.
Review property income totals for the year. Remember, the management fee portion of the escalation bill is a product of the total income account of the property. Review expenses, category by category.
Never accept the annual billing summary sheets as adequate back-up documentation for payment purposes. These documents are too general; get as much detail as possible.
2. Overtime air conditioning/heating charges
Be aware that mistakes, miscalculations and overcharges often occur. If your business operation requires overtime, it can be particularly expensive.
Never pay overtime service charges without obtaining and verifying the actual billing calculations. The landlord or managing agent should provide you with the list of equipment used to provide the service; the amount of electricity consumed by the equipment to provide the service; and the dollar rate per kilowatt hour used to calculate the total hourly bill.
When calculating overtime air conditioning and heating charges, many landlords use the building average cost per kilowatt hour. This can be as much as 40 percent too high. The building average rate usually includes a demand charge. In most buildings, the demand charge is incurred during the peak building operating hours — usually 10 a.m. and 3 p.m.
There should be no demand charge included in the overtime air conditioning or heating hourly rate.
3. Subsidizing other tenants’ operations
An often-overlooked area of overcharges deals with other tenants’ operations which require building services that exceed normal building operations.
Many buildings have one or more anchor or major tenants. Landlords are notorious for granting lease concessions and favors to anchor tenants, ie., additional hours of operation, additional security and cleaning, etc.
Who is paying for the utilities associated with additional hours of office operation? Who is paying for the additional security shift? If you don’t look for these items in the escalation totals, you very well may be.
It’s fairly easy to find out if this is going on. Ask to review the building’s after-hours utility meter reading logs for both electricity and water. If the readings are high, it usually means that equipment is running after hours. Either some tenants are working after hours or the building is being run inefficiently. The landlord or the tenant involved, not you, should be paying for all associated costs under the guise of escalations.
Visit the building after normal operating hours. If you see too many employees or too much activity, ask the landlord what is going on after hours. Get the answer in writing. This will help keep the associated costs out of your operating expense escalation bill.
The key to avoid being overcharged is knowledge. Ask questions. Ed Eriksen is a principal of the Tenant Advocate Group. He can be reached at (800) 699-4901, via e-mail at [email protected] or on the Web at www.tenantadvocate.com.
