By John Beck, Esq.
Controlling Costs starts with the RFP
Earlier this year, we were asked to prepare a training session for a client’s transactions team. There are so many moving pieces in your leases today, that as a lease negotiator, it can be hard to stay on top of every nuance in every lease provision.
At Chelepis, we believe that tightening up your operating expense provisions from the outset of lease negotiations, beginning with your Request for Proposal (RFP), is the best method for controlling future occupancy costs.
Therefore, we give you the following HOT TOPICS for operating expense negotiations:
1. Overtime Heating, Ventilation, and Air Conditioning (OT HVAC) must be billed at actual, out of pocket cost without markup
Your first thought may be, “Overtime HVAC is not an operating expense under our leases.” To which we would generally agree with you, and we don’t advise that you define it as an operating expense (OPEX). However, we’ve recognized OT HVAC to be one of the most overlooked components of additional rent, and when it is overlooked (i.e. the landlord is allowed to set an “arbitrary” rate per hour) OT HVAC can become one of the costliest pieces of your additional rent.
When you know that your employees will be working beyond standard building operating hours, push for OT HVAC to be billed at actual, out of pocket costs. Take it a step further and request that the landlord provide a current hourly rate certified by a professional engineer. Have your engineer or Chelepis review it too!
Practice note: Generally, rates over $25 per hour per floor should prompt a review.
2. Above Building Standard (ABS) Services must be billed at actual, out of pocket cost without markup
Similar to the challenge above, you should request that billing for any ABS services will be billed at “actual, out of pocket cost without markup”. Again, we recognize that ABS services are not typically included in the OPEX provision, but we so commonly see markups, admin fees, or other fees added to ABS charges that we must include this at #2 on our Hot Topics list.
Consider this: if your landlord is billing you hourly charges for ABS Services, and billing you directly for it, are they backing out the associated payroll from building’s operating expenses? This finding may not be discoverable until you execute a lease audit. Your lease language should make it clear that all ABS costs are excluded from OPEX.
3. Gross up components are fixed, semi-variable, or directly variable
Another topic that makes our list on an annual basis: gross ups. This complex area of operating expenses can make seasoned negotiators heads spin. We’ll keep it simple, if you are allowing your landlord to gross up expenses, insist that operating expenses are classified into one of the following three categories:
Fixed (e.g. real estate taxes, parking lot lighting, landscaping, etc.)
Semi-variable (e.g. utilities, HVAC repairs, cleaning, etc.)
Variable (e.g. trash and management fees)
4. Limit allowable capital expenditures to two types
Another perennial favorite to make this list: capital expenditures. As a lease negotiator, you should start from the position that you will reimburse the landlord for only two types of capital expenditures:
Required by law
Documented energy savings