Is it Time for an Operating Cost Audit?: Franchise Tenants Unite!

When was the last time you challenged a landlord or property manager about the operating expenses or common area maintenance (CAM) charges? Probably not recently or never, right?

To clarify, operating costs are the day-to-day management and maintenance expenses charged to the tenant; examples include asphalt repairs, snow removal, property insurance, and so on. Franchise tenants pay a proportionate share of these costs based on the space they occupy. Therefore, if a franchise tenant occupies 12 percent of a building, he or she will pay for 12 percent of the operating costs. Paying by this said ratio is the industry standard but, of course, there are deviations for special circumstances like free-standing buildings and so on.

Nonetheless, every lease generally or specifically outlines what can or cannot be charged back to the tenants … but it's up to the tenants to be watchdogs. A good industry rule of thumb is that an expense only qualifies as a legitimate recoverable operating expense if all the tenants benefited from the work (such as fixing parking lot potholes - but not replacing installing window blinds or painting walls for a tenant as an incentive to renew his or her lease).

I can tell you from first-hand experience that landlords and their property managers often take liberties and frequently make mistakes in charging back or recovering common area maintenance charges from tenants. Practically every operating cost audit I performed (typically for a group of tenants in the same property) was riddled with discrepancies or chargebacks that should have been born by the landlord at the landlord's expense.

One of the most common discrepancies is when the landlord doesn't pay for the operating costs attributable to vacant space. If the building is 15 per cent vacant, the landlord should be paying proportionate share attributable to that vacant space. The other tenants should not be required to carry the weight.

Mathematical miscalculations by the property manager administering the operating costs are not uncommon. In one operating cost audit that we performed, we caught the error and, therefore, every tenant's administrative charges had to be adjusted.

These are a few of the shocking expenses I have uncovered that the landlord wrongly charged back to franchise tenants: leasing commissions paid to realtors, insurance and snow removal attributed to other distinctly separate properties, flowers for the landlord's secretary, kiosks purchased for mall common areas from which revenue went directly to the landlord, landlord's work improving the interior of a unit for lease and so on.

Consider getting all the tenants together for an operating cost audit. Don't be fooled by a letter from the landlord's accountant verifying that the books have been audited. All that means is that there was a matching invoice for every check written by the landlord. It doesn't mean the charge was a valid operating cost.

If you have any operating cost questions, please e-mail me directly DaleWillerton@TheLeaseCoach.com.

Dale Willerton - The Lease Coach - works exclusively for commercial, office and franchise tenants. He provides coaching and consulting services regarding commercial leases and/or lease renewals. Willerton frequently speaks IFA and CFA Franchise Expos plus has written the industry-specific book, "Negotiate Your Franchise Lease or Renewal." For more information, please visit www.TheLeaseCoach.com or call 1-800-738-9202.