6 Ways to Mitigate Risk Exposure to Your Operating Expenses

Capital expenditures on a commercial building can amount to millions of dollars. Normally, landlords can incur capital costs at any point in the lease and begin amortizing and recovery from tenants. This is a standard commercial real estate (CRE) Industry procedure. Usually, they are amortized over several years in accordance with GAAP, but this is only sometimes the case. Once started, the incremental increase to your operating costs can remain there for five to 30 years and pose the most significant risk to tenants’ commercial lease operating expenses.

If your landlord supplies you with a capital expense plan up front and you know they are coming, it is easy to prepare for the additional costs. The problem is that, in most cases, they don’t. Many landlords consider it confidential, leaving commercial tenants with sudden dramatic increases in their well-planned operating expenses. A lease audit may also uncover hidden administrative charges added to the capital costs, which are generally not recoverable.

So, what do you do if your landlord is not forthcoming with their capital plan? 

Six ways to avoid surprises in your operating costs

1. Ask BEFORE you move into a building. If the landlord refuses, consider other options.

2. Ask your landlord for a copy of their capital plan. They may not oblige, but it can’t hurt to ask.

3. Analyze your current operating costs. Do they include capital amortization?

4. Understand the size of the expenses and what is being amortized. Smaller amounts may indicate significant charges are looming. 

5. Understand the age and renovation history of your building. Are significant capital costs likely, and will they overlap with your tenancy? This can cause an unexpected spike in your operating costs.

6. Amend your lease wording to protect against cost spikes and manage your operating costs long-term.  

CREiQ helps tenants during the negotiation process to better manage their commercial real estate portfolios and protect against financial risks. Our extensive proprietary database of building information can provide important insights into unknown occupancy risks and assistance to avoid them. 

Negotiation support is just one of a range of end-to-end lease lifecycle services CREiQ provides for commercial tenants.

 

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