Lease expenses are usually the highest expense businesses spend their money on.  Tenants need to ensure they are not overpaying.

1)       Inflation and general market conditions usually results in year-to-year increases in building expenses for the landlord.  So slight increases passed on to the tenant is normal.  However any sudden increase is cause for concern.

2)      When a change in the landlord or management occurs, leases should be reassessed.  The fees for services could change and the tenant may overlook these changes.  For example, the cleaning company could be a third party who changes hands to another cleaning company.  The new cleaning company could charge higher rates, thereby having those expenses passed on to the tenant.

3)      If construction projects are happening in your building, conduct an audit of the expenses.  Check your lease since the lease may state that any construction project expenses are not included under your lease payment obligations.  Also every capital improvement should be checked to see whether or not it is compliant with the lease terms.  Usually the tenant has to pay for capital improvements to a building but this usually applies only when the improvements alleviate future operating costs.  Also, it’s important to note that many times it’s not too late to audit the landlord even years after a capital improvement since most times these costs are broken up into several years thereafter.  So check your lease and audit your landlord if needed.

4)      Make sure to check your lease when it begins/renews and expires.  You can check future years against your base year and track any changes.  It’s important to check your lease and validate your expenses, and to then manage the expenses in future years.  Audits of leases can be very helpful when renewing a lease as well.

5)      Occupancy rates in a building are critical in tracking operating expenses.  Check to see if your lease has a fixed or variable expense rate.  If it’s variable, keeping track of occupancy levels in the building is essential in helping you figure how your expenses change with time, and shifts in tenant occupancy.

6)      Make sure to review your expenses in an itemized manner.  Reconciliations are key components to look at.  Not looking over the lease reconciliation at the end of the lease term can be very costly.

7)      Especially with the most recent downturn in the commercial office market, landlords are being increasingly pressured to pass on extra charges to the tenant.  Now it might be difficult to differentiate between legitimate charges and bogus charges due to the landlord’s financial distress, so an audit may be the right choice.  It’s important for you to know that audits are common, and landlords are usually ready to respond to your inquiries.

Let’s say you run a supermarket and you purchase $3,000 worth of fruits and vegetables from the wholesale supplier.  Once the produce is delivered, you receive an invoice, sign it and pay for the total.  After thirty days, you check the bill and realize that you were overcharged $500.  Upon taking a closer look at the invoice, you realize that no dispute will be reviewed after thirty days, and no money will be refunded to you.

To parallel this analogy, pretend you are a tenant who represents the owner of the supermarket, and the supplier is your landlord.  Beware of the clauses in the contract.

Most office leases provide a clause that states that the landlord will provide reconciliation of expenses at the end of each lease year.  If the tenant does not review and audit the charges within a certain period of time, the tenant effectively waives the right to challenge the expenses and is basically stating that the charges are correct or acceptable.  The charges can include things such as utilities, maintenance, cleaning, and repairs.  In case the landlord goes above a certain agreed limit in the lease, or charges extra for anything that is not in the terms of the lease, and you pay that amount, the money may be lost.

Many landlords are increasingly using sneaky tactics to milk the tenant, especially in these difficult economic times.  The language of leases is becoming more and more difficult to understand, and more expensive for the tenant to conduct an audit.  Increasingly, the language is containing more exceptions and more contingencies in the tenant being able to challenge the landlord and conduct an audit.  Here are some examples:

1)      Very little time allowed to dispute charges.

2)      No audits contingent on any outcome which makes the tenant spend money.

3)      Only certain recognized accounting firms can be used (which are usually more expensive)

4)      The audit has to be conducted in person with the landlord.  Nothing can be done over the computer for example.

5)      Limited scope that the tenant can share information to its employees, staff, or other third parties other than the CPA and financial department.

So how can you fight these restrictions enforced by your landlord?

1)      Make sure to receive at least three months to be allowed an audit and up to three years to fight for any bogus charges.  By law, the accountant you work with will be required to keep any documents for a three year period.

2)      Do not restrict yourself with contingencies to conduct an audit.  Sometimes your landlord will demand that you audit based on an hourly basis, so try to get the landlord to pay for it.  These costs can be as much as $30,000 – $45,000 per year depending on the size and nature of your business.  Keep in mind that working with small accounting firms will cost you less.

3)      Make sure to review the expenses with your staff that handles the finances before you approach a CPA firm.  Many times, a CPA firm that does not specialize in commercial office leases in New York City may not be as familiar with our lease as you or your own staff may be.

4)      If you work in a commercial building with more than one tenant, you should conduct an audit at least every 2-3 years for large leases, especially if the charges suddenly jump from one year to the next, the owner changes, changes in how expenses are categorized, or if there are significant changes in tenant occupancies.  Make sure to shop for an experienced CPA firm.

Typically, the largest expense for a tenant is the costs of leasing an office.  There are 9 common mistakes you should be aware of during your NYC office search.

1)      Poor Planning:  Finding the right space isn’t as simple and obvious as you may have thought.  Efficiency is important in leasing an office.  You may find out that 1,000 square feet is not equal qualitatively as 1,000 square feet in another space.  In New York City, a typical tenant will experience the loss of roughly a quarter of the space in a contiguous floor and about 35% in a floor with multiple tenants where there is space lost due to common shared areas.  Sometimes with business trends and improvements in technology such as cloud computerized storage, the space that employees use could simply be outdated.  If employees could function in a more open office environment, cubicles and offices could be removed, thus resulting in less needed office space.  An architect can help tremendously with this cause.

2)      Are you looking for office space on your own?  Hire a broker to represent you.  Stay focused on your business and let someone who is a professional handle the office search and negotiations.  Seek a broker that has experience with negotiating with landlords and understands the market conditions.  Hire a commercial real estate lawyer to handle your legal needs.

3)      Why is getting a lawyer so critical?  If you don’t hire a lawyer, you lose your credibility in the eyes of the landlord.  Hiring a commercial office lawyer is very important.  Do not settle for a residential or retail real estate lawyer.  Do not let yourself get ripped off by your attorney.  Research first.

4)      Look over the lease contract.  Remember that the landlords tend to make the contract lengthier in order to squeeze more money out of the tenant.  Also make sure that the space is properly zoned for your commercial use.  If not, you could be forfeiting lots of money.  Also, make sure to have an inspection done on the premises.  Sometimes the HVAC does not work properly even though the landlord says it does.  This will help you avoid costly replacements in the future.

5)      What are the three rules in searching for an office space?  Shop, shop, shop!  Compare the office lease you’re thinking of signing to other comparable offices.  You may find out you will be paying way too much.  To help you with this, make sure to hire a broker to do the right job for you.  Brokers can help better determine how badly a landlord is looking to rent out a particular space.  This can help you save money.  There’s something known as a letter of credit that landlords prefer as a security deposit.  Without a letter of credit, in the even a tenant goes out of business, the creditors get paid first and the landlord is left with nothing.

6)      Read your lease!  Don’t be lazy when it comes to going over your lease.  Most people don’t like to read leases, but it’s a crucial part of leasing.  There are certain clauses you would want to see in the lease.  If, for example, the lease states that the landlord can have you relocate to a new floor, is there any specification of how much notice you will be given?  Make sure you have enough time to relocate.  Remember that usually moving is more difficult and time consuming than you might think.  What about a clause dealing with subletting?  Is that mentioned in the lease?

7)      Landlords want their spaces filled, and many times are willing to negotiate to more favorable tenant terms.  This is true even for small tenants in large office buildings.  Most tenants are small in New York City, so if you’re a small tenant don’t let that intimidate you.

8)      Large commercial brokerage firms will not necessarily represent you in your best interests especially if you’re a small tenant.  Large firms will usually have the landlord’s interest more than in your own interests even though you were given the impression that it’s the opposite.

9)      Signing a new lease or renewing an existing one can take months, so make sure to plan accordingly.  A general rule of thumb is that the bigger you are, the more time it takes to move into your new office location.

SNDA- an acronym for Subordination & Non-Disturbance Agreement is an agreement that a lender provides a landlord in the event that the landlord goes bankrupt. SNDA protects the tenant by guaranteeing the tenant the space in the event of a lender takeover. Some get nervous when they encounter SNDA’s, but they provide protection from unseen circumstances.

SNDA’s provide real protection from defaulting landlords. Without an SNDA, the tenant is not protected. Basically, without a building owner, the lease has no connection with the lender. The lease could be considered void if the lender views it to be so and the tenant could end up on the street.

However, it should be noted that lenders who takeover ownership of buildings with low vacancy rates tend to allow tenants to stick with their respective occupancies. This is especially so with buildings that contains tenants who have favorable payment histories. Lenders usually do not want change unless a vacant building is more appealing and less costly than having tenants paying their rents. The prospect of kicking tenants out in order to renovate or gut an entire building or to lease out to a larger company usually does not outweigh letting the current tenants stay and pay. So, the tenant most likely does not have much to worry about.

Common sense comes handy in relation to SNDA’s. If the tenant foresees a possibility of a commercial building being converted into residential use several years into their 15 year lease, caution should be used. If, however, the building is a larger commercial building with class A tenants, the chances of a lender changing the use of the building are slim to none.

SNDA’s are difficult to get from landlords since lenders usually don’t want to deal with helping tenants secure a space especially when the landlord caused the liability for the lender in the first place. A tenant who occupies a small space is much less likely to secure a SNDA. It is important for tenants to discuss this issue with their broker or lawyer.

Companies that are smaller are 30% better at providing excellent customer service than their larger competitors, this according to a leading market research group. Larger companies are less focused on the satisfaction of their customer base than are their smaller competitors. Smaller companies usually rely more on word-of-mouth leads, hence the importance of customer service and satisfaction.

Here are some useful facts.

1) A dissatisfied customer will advise on average between 10 and 12 people about their negative experience. 15% of upset customers advise an average of 25 people.
2) Customer service representatives that provide exceptional customer service see 10 times the sales numbers than those companies with a low emphasis on customer service.
3) Normally, one negative experience can be compensated by 9 equally positive experiences.

According to studies, the cost to bring in a new customer is 5 times costlier than keeping an existing customer. Studies show that two thirds of companies that revamp efforts on exceptional customer service see their sales increase by 15-30% in their first year. Some companies see the value in great customer service while others will simply lag. When all is said and done customers have the final word.

The National Association of Realtors has stated that the commercial real estate market in 2012 will continue to show slow and steady growth. After experiencing drastic declines in 2008 and 2009, the commercial market has slowly rebounded since 2010, and the trend has continued. Since 2010 vacancies have decreased and asking rents have increased.

However, off to the eastern horizon, the European Debt Crisis has caused a dark cloud to linger over the Manhattan commercial skyline. Fortunately this dark cloud has dispersed somewhat after the European central banks loaned more than 600 billion dollars to European banks, leaving the commercial real estate market in New York in a much healthier position to benefit from this infusion of capital into the European financial system. Hopefully this trend will last.

There are currently 89 office condominiums in Manhattan with a total of 10 million square feet. Here is how it’s broken up: Midtown has 6.2 million square feet, Midtown South has 2.52 million square feet, Downtown has 1.86 million square feet. Class A comprises 3.4 million square feet, Class B comprises 4.47 million square feet, and Class C comprises 2.36 million square feet.

For the first half of 2011 there was three times more office condominiums sold than in the first half of 2010. The amount of sales had increased by $50 million in the same periods. However, the sales amount was 25% less in the first half of 2011 than the second half of 2010.
Compared to the first half of 2010 the average price per square foot in Manhattan was down 5% at $540. The average price per square foot has wavered up and down because of higher office demand in the Chinatown area. Chinatown fetches higher prices in the past several years. Also, the office condominiums that have been sold as of 2011 have typically been larger spaces, thus reducing the average price per square foot somewhat. There were 30% fewer condominiums sold in the first half of 2011 compared to the same period in 2010.

REITs have performed noticeably better than the average mutual fund. Whereas the average stock mutual fund lost 3% last year, REITs have added a healthy 8%.
REITs are holding their ground mainly from a stronger residential apartment market. This as the average consumer will rather rent than buy a home or apartment.
Storage facilities have also fared well as foreclosure rates have gone up. The storage industry has continued to show strength over the last 30 years.

A question many tenants ask is “What is the right amount to use as a security deposit?” I can’t give you a simple answer to that. Despite what some think, the security deposit is simply the hedging against what the landlord perceived to be the financial risk that a tenant could potentially pose. There are two questions that landlords ask themselves when determining the security deposit amount:

1) How much does it cost to get this new tenant such things as free rent and construction?
2) How much can I count on the tenant paying the monthly rent?

If the tenant is a large and reputable company like Nike, then no security deposit would be necessary. However, a small tenant starting a new business would demand a high security deposit amount. Security deposits can run anywhere from 0-24 months. Here are some tips to get a lower security deposit.

1) Try to find existing built spaces. Built to suite spaces where the landlord needs to spend money on construction costs will usually pass costs down to you as the risk increases.
2) If your lease includes more free months rents, your landlord has more revenue go out of his pocket so more security will be requested.

Consider that landlords usually prefer 12 months of half the rent as opposed to 6 months of free rent. This is so because the landlord would rather see cash flow immediately. This reduces the risk for the landlord. The more you’re willing to offer the landlord initially, the better the chances of getting a favorable security deposit.

Question: What’s a burn-down?

A burn-down is a way for the tenant to reduce or eliminate the security deposit by making on-time monthly rent payments to eliminate the risk seen by the landlord. For example, if you have a 10 year lease and have six months of security deposit, after the third year you could reduce the security deposit by one month. Just make sure to place provisions for a burn-down in the lease.

What is the largest expense for a commercial landlord other than the debt owed to the lender?

Answer: Real estate taxes.
Nearly half of New York City’s revenue comes from real estate taxes. Furthermore, real estate taxes in New York have doubled in the last decade.
Did you already know this? If you are a tenant, should you care?

Well, I don’t know the answer to the first question, but if you are a tenant you certainly should care. When the taxes go up for the landlord, the expenses get passed on to the tenant. New York City relies heavily on the income generated from real estate taxes. Furthermore, if the taxes increase during your lease term, the landlord will increase your tax payments as a tenant.
Landlords do not know when or how much their tax rate will go up each quarter, but when it does, as history has consistently shown, the tax increases get passed down to the tenant. So, here is an example:
If you are a tenant that is leasing say 10% of the total office building and the building’s tax rate is $100,000 in the first year, the tax would be $10,000. For year two, the city jacks the tax rate to $110,000, so you would pay 10% of that increase of 10,000 which is $1,000. But in reality, a commercial building in New York City will be higher than $100,000, so an increase of 10% could be significantly more. However, really getting an understanding of how this all factors into your lease are not so simple.

Let’s take a deeper look. A building that goes through a floor-by-floor renovation has its value changed. When the value changes, the taxes for that building change; in this case – up. However it is important to note that these increases do not usually get tacked on in one year but gets spread over several years. This way, the expenses get paid by the tenants over time. But tenant beware! Sometimes these tax increases could easily be in the millions, so a mere 5% that you occupy could result in hundreds of thousands of dollars in extra costs. So make sure to work with your attorney and broker to make sure they insert a tax clause for you, that your percentage of occupancy is accurate, and make sure you get any breaks that the landlord receives for any tax reimbursements.