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Round 3: What Tenants & Landlords Should Know About Operating Expense/NNN

In my last article on operating expense and NNN pass throughs in a lease, we looked at how expensive it can be for a tenant to pay their share of unreasonable property management fees.

This month, we look at another expense passed through to tenants where landlords commonly pad the number in their favor: Salaries.

You are probably already paying your share of property management fees.  Now, in addition, you have to pay for salaries for everyone that works at the property from janitorial to maintenance to property managers and maybe even more.

I am currently involved in an operating expense audit where the landlord has decided that from one year to the next it is reasonable to increase these salaries by more than 50%.  In addition, the actual hours worked at the property didn’t substantially increase.  How is this possible?  Because the landlord sold off some his properties and he allocated his employees’ salaries over the properties he owns.  So, the less property the landlord owns the more you as a tenant pay for your share of this category.  Needless to say, I think my client is going to prevail in the matter –especially since I negotiated the lease before it was signed so that this kind of thing won’t happen.

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.  But you have to have a broker and/or real estate attorney savvy in this area who can set the lease up correctly or you might be stuck paying these kinds of unreasonable expenses.

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 for how to negotiate the lease in this area and 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 as I have in depth experience and knowledge in these areas including operating expense/NNN audits related to commercial properties.

Every tenant and landlord should have their operating expenses audited by someone that understands them fully to make sure they are correct.  If you don’t, it will cost you.

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Best Way To Sell Commercial Properties

Right now is a great time to sell commercial real estate in general, but especially in Southern California where my primary market is.  Why?  Sale prices are at all-time highs, there is very limited supply inventory (so not much on the market for sale), and all kinds of buyers are looking to buy what little amount there is available for sale –driving up prices with multiple bids usually.

So, why should a seller hire a broker and pay him a commission when a seller can do it on their own?

  • Simply put, the seller will not be able to get the maximum price that a good broker can.   Many brokers have clients waiting in the wings to buy a property and these clients will pay top dollar if they are allowed to make the offer first.  Also, the price a broker is able to sell a property for more than pays for their commission.
  • Sellers don’t have the same marketing ability as a broker.  The world has become international and your reach has to be international.  The dollars are flowing into the US from other countries right now and international buyers are willing to pay more many times.  Brokers also know what is needed in terms of a marketing package to interest buyers. It’s complicated, expensive, and time consuming to put this package together properly.
  • The timing of when to put the property up for sale is critical.  When is the market peaking?  Is there a lot of competition on the market for sale now?  Good brokers will usually know what is for sale on the market as well as off market, but sellers won’t.
  • The repairs that you need to make to the property before you put it on the market are also important.  Some are worth making and some aren’t.  A good broker usually knows what to recommend.
  • What should the asking price of the property for sale be?  What if there are no comparable prices for the sales price because the sales price is higher and the property won’t appraise for the sales price?

There are many other factors in selling a commercial real estate property; but, in my opinion, it starts first and foremost with the right broker.  Doing it on your own is always a mistake.  If you don’t hire the right broker or if you do it yourself, it will cost you.  I have seen it many times.