In my last article on operating expense and NNN pass throughs in a lease, we looked at how expensive and unreasonable it is to require a tenant to pay its share of an insurance policy with a large deductible such as with an earthquake policy.
This month, we look at another expense that is commonly passed through to tenants where landlords pad the numbers in their favor: Property Management Fees.
Why should a tenant pay a landlord, or the landlord’s property manager, to manage their property as part of operating expenses? And, even if a tenant does have to pay their share of this fee, shouldn’t the fee be based upon the amount of hours actually spent managing the property?
The short answers are that the tenant really should not have to pay a landlord to manage the landlord’s property. This should be included in the rent. But it is almost always added. And the amount of the property management fee should be reasonable and bear a relationship to the hours actually spent working on the property. Unfortunately, it usually doesn’t reflect that as most management fees are instead based on a % of the total revenue collected at the project. This fee is usually much higher than it should be, especially compared to the actual hours spent managing the property.
What is a tenant to do? How can a tenant get the landlord to be reasonable here? That’s where I come in. Having directed some very large landlord companies for over 25 years has given me great insight into how to help a tenant in this area.
This is just one of many examples of operating expenses/NNN a tenant is exposed to in most leases. Most tenants, and even landlords, don’t really understand this particular issue until it happens and it’s too late. Stay tuned for my next blog with more examples and even some savvy advice for landlords on my recommendation on how to negotiate the leases in this area. I also have advice on how to calculate these expenses correctly so you don’t end up losing the tenant at renewal time and/or get into expensive litigation over this matter.
If you are a tenant or landlord and want to find out how to avoid pitfalls related to leasing, buying, or selling, please contact me. I have in depth experience and knowledge in these areas including operating expense/NNN audits related to commercial properties.