Shave off your commercial real estate lease costs by examining the potential landlord’s documents.
Part 1 of 2
Before you sign a lease for Tucson office, retail or industrial space, you should thoroughly understand all of the costs that make up the CAM (common area maintenance) costs and operating expenses and how much you will be responsible for.
Without that knowledge, you can’t make an informed decision about whether leasing the proposed space will make financial sense.
Start by looking at documents that the landlord already has. They’ll reveal important information about expenses you’ll be responsible for. Be prepared to ask for a disclosure of CAM costs and operating expenses since many owners don’t voluntarily provide this information.
Building Expense Schedule
This break down lists building expenses by category, such as cleaning costs, energy and insurance. An owner generally prepares an expense schedule and sends it to tenants after the end of each fiscal year. Expense schedules from the past several years will help you determine what was charged to tenants.
There are well-established norms for each category of expenses, so an expense schedule is a good indicator of whether the building properly managed. (High expenses can indicate mismanagement, but bear in mind that energy and insurance costs have risen dramatically over the past few years.)
If you are dealing with a new building, review a budget of its projected CAM costs and operating expenses, including real estate taxes.
Historical Operating Expense/CAM Cost Data
Understanding past CAM costs and operating expenses over the past three to five years will tell you how much those costs have risen and help you estimate future increases. We review all underlying financial information, including sample escalation statements.
Other documents you should look at include
- timetable for future capital improvements that you will pay a share of
- a five-year history of real estate tax bills for an idea of who owes what amount in taxes
- a five-year history of utility costs and taxes.
Visit the owner’s website to see recent or future renovation or expansion projects. You’ll learn whether an expansion project will result in a change in the gross leasable area (GLA) of the building that will affect your pro rata share of operating costs.
The declarations page of the owner’s insurance policies on the building will reveal
- any insurance coverage that the owner already has that you should not pay for
- the deductible amount if you’ll be required to pay a share of it. This could cause big increases in your share of costs.
Accounting of Base Year Expenses
With a base year lease, you are responsible for any increases above the base year’s CAM costs and operating expenses. If the base year’s CAM costs and operating expenses are set too low, you’ll have to pay a share of very large increases.
An accounting of the base year’s CAM costs and operating expenses—or a budget for the base year of a new building—will help you understand what your costs will be.
Utility and Tax Bills
Previous costs for utilities and taxes will help you determine the estimated cost of operating the space and the building.
Get bills for the previous five years. Also, get a written explanation of any tax abatements or reductions.
About Commercial Real Estate Group of Tucson: As a commercial real estate broker that represents only tenants in lease and investment transactions, we know what to look for to reduce your share of CAM costs and operating expenses. We address these issues during our document research and review and in thorough negotiations. Our goal is to protect you from many building pass-throughs. For more information: 520-299-3400, commercial-real-estate-tucson.com, firstname.lastname@example.org.