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LEASE AGREEMENT REFERENCE GUIDE 1560: TENANT STRATEGIES TO MODERATE OPERATING COSTS $24.95


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Lease Strategies
1560

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This LARG looks at how the tenant can contain operating and common area maintenance (CAM) costs over the next several years. Dropping vacancy rates are pushing rents up across the country, and tenants are experiencing sticker shock. While it is natural for tenants to focus upon rising minimum rents, they should not lose sight of operating and CAM costs as a component of rent.

The first article briefly discusses the realities of the rising market. The Lease Clause Critique lists a dozen pro-tenant devices to help keep the tenant’s share of operating and CAM costs within reason.

Number of Single Spaced Pages: 12

 

Excerpt

Tenant Strategies to Moderate Operating Costs

 

When Sticker Shock Hits, Don’t Forget Operating Costs

It’s instructive to look back at what happened during periods of rapidly rising occupancy costs, such as the first half of 1977. Office rents were headed up. According to CB Commercial’s research arm, office rents jumped 20% in Boston, 18.8% in Dallas and Fort Lauderdale, 15.4% in Stamford, 14% in San Francisco, and 13.7% in Miami during the period.

What’s a tenant to do during such periods, especially one that’s committed to containing long term occupancy costs?For starters, it is more important than ever for tenants to conduct a professional and thorough search when looking for new space for their operations. That generally means hiring top quality people for the search, including brokerage and space planning consultants. As the total rent bill increases, the cost of such services is money well spent.Once the tenant decides on its short list of locations, negotiations on the rent package are likely to be tougher than ever.

This means the tenant must let the landlord know it is negotiating simultaneously with several other landlords for comparable space.The minimum rent under the lease will probably receive the lion’s share of the attention during negotiations. That’s normal, particularly in a rising market. But the tenant should not forget to review the operating cost provisions of the lease with great care. Operating costs have been marching upward during the last ten years, and they constitute a significant part of the total rent package.

In addition, operating cost provisions are nearly always much more complicated than those covering the minimum rent, and it’s difficult to attach a precise number to the tenant’s share of such costs over the term. Therefore, it behooves the tenant to negotiate as much protection in the lease as its leverage will allow to protect itself from future operating cost increases.

The tenant must do three critical things to reduce the rate of increase of operating or CAM costs:

  • Negotiate language in its leases which limit the type and amount of items which can be included as expenses passed through to it for reimbursement;
  • Monitor the annual statements of operating and CAM costs to ensure that the landlord prepares them in accordance with the language of the lease; and
  • Audit the landlord periodically to convey the message to the landlord that the tenant is serious about restraining its operating or CAM expense contributions.

Although typical pro-landlord language describing the type of expenses that may be passed through to office or retail tenants usually is very broad, several concrete suggestions follow for the aggressive tenant wishing to limit the amount it pays as operating or CAM cost reimbursements.

#1: Draft and Use a Pro-Tenant Operating Cost or CAM Addendum in All New Leases
Pro-landlord language covering operating and CAM costs is often so broad that landlords can include almost any expense with some sort of connection to the complex or center in which the tenant leases space. As a result, many office and retail tenants want more predictability as to which costs will actually be included when the landlord prepares its annual statements for operating or CAM costs. And many landlords these days (especially those in soft markets, or those with empty buildings) are willing to be more specific in the documentation about what operating or CAM costs will be actually collected.

One way the tenant can provide such additional detail concerning operating or CAM costs is to attach an operating costs or CAM addendum to the lease. Such a device normally contains considerably more detail than the operating costs or CAM section in the lease concerning the precise costs that can and will be collected by the landlord.

In many cases, the addendum contains a list of tenant oriented exclusions to operating or CAM costs, which cannot be collected by the landlord. It is a fairly easy way to include supplemental provisions pertaining to operating or CAM costs in a deal where negotiations start with the landlord's printed lease form.


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