A major component (30% or more) of an office tenant’s rent bill is property taxes & operating expenses (“T&O”) which today is on the rise and where tenants have limited control under landlord-favorable leases. In Chicago, T&O is rising significantly and where most buildings quote rents on a “net” basis (which may be comparable), the amount of T&O can vary significantly among buildings. While tenants and their advisors will fight hard on the rent and other deal terms, if T&O is not properly vetted and negotiated, those deal terms will be far outweighed by surprisingly large T&O costs. In this post, I discuss the two common rent structures and offer strategies on limiting increases in T&O to provide tenants with cost certainty.
Now that the holiday season is over, ‘tis the season for Operating Expenses and Tax reconciliation for office tenants. As most office leases allow the landlord to recapture increases in Operating Expenses and Taxes (which tenants commonly pay on an estimated basis over a calendar year), landlords are required to reconcile the year’s actual expenses and taxes to the tenant’s estimated payments. That reconciliation statement is typically issued in first quarter. If not carefully reviewed by a tenant, in all likelihood money is being left on the table as 90% of these statements have some errors. This is particularly important in cities like Chicago where tenants are seeing major increases in property taxes. While there’s not much a tenant can do with rising property taxes, they can lessen that blow by closely scrutinizing the operating expenses. Now, more than ever and in light of the new accounting standards, tenants must be aware of their occupancy costs and diligently pursue their audit rights. Outlined below are strategies tenants should employ in reviewing these statements as well as some ideas on how to craft these provisions in future leases. I am joined on this post with Mirela Gabrovska of MBG Consulting, a national expert in lease administration and auditing.
On November 11, 2015, the Financial Accounting Standards Board (FASB) decided upon the effective date for the long awaited and much debated new lease accounting standard requiring companies to recognize leases on their balance sheets. The effective date for public companies will be in fiscal years (including interim periods within those years) beginning after December 15, 2018. The effective date for private companies will be for annual periods after December 15, 2019. Upon issuance of the final standard, which is expected to be early 2016, FASB allows for early adoption which some companies will do to meet SEC requirements.
Willis Tower sells for $1.3 Billion. Such eye-popping sales headlines are fairly common today. With low interest rates and rising rental rates, we’re seeing record volume of office building sales in Chicago and many markets nationally. As part of the sale of an office building as well as refinancing, tenants will receive a document known as an “Estoppel Certificate” from their landlord as is commonly required in most office leases. Below is a brief explanation of “Estoppel Certificates” and what tenants should consider when negotiating their lease and what to look for when reviewing one.
Hurricane Sandy devastates the northeast. As recently reported on Bloomberg (http://www.bloomberg.com/news/2012-11-09/lower-manhattan-quiet-as-sandy-shuts-one-third-of-offices.html) 33% of the 101 million square feet of lower Manhattan’s office space was inoperable as of November 7th, several days after Sandy’s landfall. Likewise, immediately after 9-11, areas of lower Manhattan were closed off for months. Manmade disasters and storms are not just limited to New York or the coastal areas. In 1992, Chicago’s Central Business District was closed for days due to a flood of an abandoned underground tunnel system. Falling into the trap – “it’ll never happen to me” – many tenants and landlords pay short attention to the lease provisions pertaining to a casualty. Outlined below are steps tenants can take pre-lease and during lease negotiations to safeguard their interests. Also addressed below is where there is no damage to the building, but the building is inoperable due to lack of utilities, access, etc. Most leases, however, do not provide the tenant with any rights if they are denied use of the building without building damage. Under a separate post, I address what tenants need to know about insurance.