In full-service gross office leases, landlords typically pass on a pro-rata share of operating expenses (OPEX) related to the tenant's occupancy of the space. In the most common office lease, tenants are only responsible for common area maintenance, utilities, property insurance, and property tax increases over the “base year” amount which is most often the year of the commencement date or the year following the commencement date.
Each year during Q1 you and your accounting department receive estimates of current year operating expenses as well as reconciliation of previous year actual operating expenses.
What to Expect
Since landlord’s pass through operating expenses to tenants they have little incentive to control these costs. For this reason, operating expenses almost always increase from year to year. You can view any OPEX category that increases less than 3% or 4% over the previous year as reasonable while anything over that should be explained by the landlord.
Check the Math
If the Landlord doesn’t itemize your charges be sure to ask for an itemized break down by category. Whenever an annual reconciliation hits your inbox without sufficient back up to verify expenses and calculations, it’s time to check the landlord’s math and determine if a lease audit is called for. Your broker can help you check the math and assess if you are being overcharged by your landlord and assist in recovering any overpayments.
If your broker doesn’t have the time or interest to assist you it may be that their brokerage doesn’t exclusively represent tenants. The dirty little secret in office leasing is that most commercial real estate brokers represent both landlords AND tenants. This creates a built-in conflict of interest that few tenants understand and even fewer brokers discuss.
So, if your broker or anyone else in their office represents landlords, you have a built-in conflict of interest. If your broker isn’t offering to assist in your annual OPEX reconciliation, it’s probably because they or someone in their firm also represents the landlord that overcharged you for your operating expenses.