#0054 - How To Protect Yourself On Operating Expenses

Confessions of a Recovering Landlord

Avogroup had a good article the other day regarding two ways to protect yourself on operating expense pass throughs from your landlord. On today's podcast, we dive deep!

Let's start with a definition: what are operating expenses? They are the monies required to run a commercial building. They can include, common area maintenance, security, electricity, taxes, insurance, etc. The landlord pays those fees and then turns around, divies them up among the tenants and bills each one their prorata share. The two avenues of protection are:

1. Always nail down your tenants' responsibilities when the lease is written. This requires a very thorough examination of just how the operating expense portion of the lease is written. You want to make sure that the costs that are actually passed through to the tenant reflect maintenance and operation costs, not ownership costs. Ownership could involve refinancing, marketing the property for lease or sale, legal costs, accounting fees, etc.
2. Audit, audit, audit - early and often! Make sure the lease states that you have the right to audit the landlords' books prior to paying any additional expenses. And then do it! By starting off your leasing relationship this way, it basically puts the landlord on notice that you will be looking over their shoulder and things had better line up! Also, some leases will prevent you from auditing the books after a certain period of time so make sure you handle this in a timely fashion.