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Tenants Need to Hire a Specialist to Audit Their Lease / Operating Expenses

You are a busy tenant running your business.  You receive your annual reconciliation of your share of expenses from your landlord about April each year.  These expenses go by different names, but are usually called NNN in retail and larger industrial spaces and operating expense increases for office and smaller industrial spaces.

The landlord reconciliation usually just shows the breakdown of each expense category, what your percentage share is, and how much you owed for the year.  You usually have been paying estimates all year so you might owe some or actually might receive a credit if you have overpaid.

Can you tell if this reconciliation is correct on your own?  I doubt it.  Most tenants that even think they can really can’t and don’t know what they are missing.  Landlords usually don’t send you enough information on the reconciliation to tell if it’s correct.  You need someone that specializes in understanding your lease and also that knows how to properly audit this reconciliation.  It’s kind of a combination between a real estate attorney and a CPA, but even having both of these on your side will probably not cover all of your bases in this area and it would be costly to use both.  There is a better way to do, it in my opinion.

I just finished acting as an expert witness in a legal matter related to a tenant vs. a landlord where the landlord overbilled the tenant for over a million dollars for their share of NNN expenses.  The tenant who I represented won the case and this has happened many times where I have been involved as an expert witness.  In my experience, I have found that landlords commonly overbill tenants and have many profit centers in their expenses that should not be there.  There are also other things in a lease beyond these types of expenses that give you financial exposure that you probably don’t even know are there.  These need to be understood and you need to be ready for them if and when they happen.

My background preparing these types of reconciliations for landlords spans over 25 years, thousands of tenant reconciliations, and hundreds of negotiations and lease audits for this type of expense reconciliation.  I also was in a position for the last 6 years of my landlord side career to negotiate over 100 leases per year. I am considered by many real estate attorneys to be an expert with a lease form whether retail, office or industrial.  Put the two types of aforementioned experiences together and you have a specialist in this expense share area like me that can really help a tenant like you.

You can hire me on a contingency or hourly basis, but it depends on your situation as to which is best.  I will be able to advise you on this in less than an hour usually and can usually tell if there is problem with your reconciliation.  Not getting it checked every year is a costly mistake.  So, if you want my help to make sure your share has been calculated correctly or you need an expert witness in this area for a legal matter or a full lease audit, please call me.

805-217-0791

david@djmcre.com

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Auditing a Landlord’s Operating Expense/NNN

In my last three articles on operating expense and NNN pass throughs in a lease, we looked at how expensive it can be for a tenant to pay its share of unreasonable insurance deductibles, property management fees, and landlord employee salaries.  This month we dive into how to do a landlord audit of these types of expenses.

First of all, a landlord should be sending you an annual operating expense or NNN reconciliation each year that compares the actual expenses incurred versus the estimated ones that they budgeted and based your estimated payment on.

Second, you should always make the landlord provide reasonable records for each of the expense categories on this reconciliation as I have found that landlords typically don’t give a tenant enough information to determine if the numbers are correct or not.  These back up records usually require the landlord to, at a minimum, send you a general ledger showing the payments for each of the expense accounts that make up the total expenses.  Many times landlords will also send you supplemental spreadsheets that give more information about how and why they billed the expenses in a certain manner so you understand it better and can make sure that it matches what the landlord is allowed to bill you for in the lease or even to just make sure the expense is reasonable.

I have successfully negotiated many landlord expense audits where, in almost all cases, my client receives a refund and sometimes for many years in the past so the refund can be quite sizable.  The ones that go the best for my clients are the ones that have someone like me that understands this area to negotiate their lease before they sign.  Having a fair lease, especially in this area of a tenant’s share of expenses, is critical.  Deleting unfair expenses, capping other expenses, and much more are necessary to make the lease fair for a tenant.

Again, every tenant and landlord should have their operating expenses audited annually by someone that understands them fully to make sure they are correct.  If you don’t, it will cost you much more than hiring someone like me to make sure it’s done correctly.  And doing it before you sign the lease is much better than thereafter but it still makes sense to do annually.  Landlords simply have too many unreasonable profit centers in their operating expenses/NNN such as management fees, salaries, property tax increases from a sale, high insurance deductibles, and so much more that can really cripple a tenant in an unfair manner.

If you are a tenant or landlord and want to find out how to avoid pitfalls related to leasing, buying, or selling commercial real estate of any kind (retail, office, industrial, etc.), please contact me as I have in depth experience and knowledge in these areas including operating expense/NNN.

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Conejo Valley Retail Real Estate Updates

Agoura Hills: Valley Bakery at 5879 Kanan (in the retail center called Agoura Hills City Mall where Agoura’s Famous Deli is also located) is set to open very soon sometime in September, 2016. It is a bakery/dessert/coffee and tea type of cafe. Café Bizou opened up another location at 30315 Canwood St., #14, by replacing the previously existing Café 14 in the Reyes Adobe Center. Café Bizou has two other locations in Sherman Oaks and Pasadena and their website is http://www.cafebizou.com/. David Massie of DJM Commercial Real Estate represented Café Bizou in both the purchase of Café 14 and the lease for this new location.

Westlake Village: Cici’s Café, a family-friendly breakfast and lunch café known for its massive breakfast selection, including decadent pancakes, should be opening its doors in late 2016 at 30990 Russell Ranch Road near Lure in between Barone’s Pizza and Aroha New Zealand Restaurants. Cici’s has another location in Tarzana and a large following.

Oxnard: Bottle & Pint, currently located in Newbury Park, is opening up their second location at The Collection where Whole Foods and many other retailers are located in the Riverpark area. David Massie represented Bottle & Pint this lease transaction.

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Round 2: What Tenants & Landlords Should Know About Operating Expenses/NNN

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.

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What Every Tenant & Landlord Should Know About Operating Expense/NNN

So, you are a tenant that just signed an office, retail or industrial lease.  And, as part of that lease, you agreed to pay your share of operating expenses/NNN.  This may be a direct share or just increases over the base year when the lease term began.  This is normal and happens in most commercial leases.

However, what varies is what expenses each landlord includes in their operating expenses/NNN and how they calculate them.  If you don’t negotiate this part of the lease correctly, your financial exposure can be way more than all of the rent you pay over your entire lease term and could even potentially bankrupt you.

One such example has to do with insurance policy deductibles.  Most leases require you as the tenant to pay your share of such a deductible if there ever is a claim.  Sounds reasonable and normal, right?  But what if it’s for an earthquake policy where the deductible is 20% of the entire project value?  This is the normal deductible carried by landlords for this type of insurance policy.  This could cost you tens to hundreds of thousands of dollars because you have to pay your share of this expense.

Here’s an example.  Let’s suppose you lease just 5% of a building.  If the entire project is worth 10 million dollars then the deductible on most earthquake insurance policies will be 20% of that or, in this example, 2 million dollars.  Your share of this is 5% x $2,000,000 = $100,000.  How would you, as the tenant, like to have to pay this amount in a lump sum suddenly after an applicable insurance claim was made by the landlord?  Especially when your rent is only $5,000 per month to begin with?

This is just one of many examples of operating expenses/NNN a tenant is exposed to in most leases.  And 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.

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Property Tax Increases Caused by a Sale: Should Commercial Tenants Have to Pay?

It’s pretty common for a commercial lease to require a tenant to pay for a property tax increase due to the sale of the property.  But is this fair?

What benefit does a tenant derive from the sale of the property?  None or minimal.  But the landlord/seller and the buyer benefit greatly at the tenant’s expense.

This property tax increase can be expensive and quite a surprise to a tenant who doesn’t understand this issue.  Example:  Suppose a 100,000 square foot office property was bought or even built over 20 years ago when market prices were low for about  20 million dollars and market prices are now high. This is very much like the current market is now.  The property could now be worth 2-4 times or more compared to when it was originally bought or built. Let’s figure on an increase of just 2 times so let’s say it’s worth 40 million now for our example.  This will cause the property taxes to go up in the same amount, so 2 times using our example.  Now the tenant has to pay their share of property taxes at this increased rate even though there is no real benefit to the tenant.

In California, the tax rate for increases is usually about 1.1% of the property value.  So, if the tenant has just 5% of the project which would equate to about 5,000 square feet and the property taxes increase as per our example above, you are going to pay the following amount now annually over and above what you were paying before:  $20,000,000 (value increase) x 1.1% (property tax rate) x 5% (your share of property tax increase) = about $11,000 per year for the remainder of your lease term.

This expense is usually quite a surprise to a tenant.  There are ways to negotiate this type of increase away but you usually have to have a very good broker to make that happen.

And this is just one example of where tenants aren’t aware of the true costs of leasing space as there are many more.  Don’t lease office space without a broker who can show you the true cost or you will be sorry.

Have more questions about: property tax or other operating expense/NNN increases, leasing, buying or selling of commercial real estate, and more?  Please feel free to get in touch!  You can contact me for help on these matters at 805-217-0791 or david@djmcre.com.

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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.

 

 

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Best Way to Find Commercial Properties to Buy in Southern California

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

So how do you, the buyer, find anything to buy?

1. Don’t try and search on your own for a property to buy. You simply won’t be able to find all of the properties out there and especially the ones not listed for sale. Hire a commercial sales broker that is experienced and knowledgeable in the market you want to buy in. Don’t use a broker that also does residential sales or doesn’t specialize in the specific type of commercial building you are trying to buy (for instance, don’t use an apartment, office or industrial broker to buy a retail property). The sales commissions are paid by the seller, so you don’t get a discount by not using a broker. Therefore, it’s a no brainer to use a broker.

2. Some of the best deals on commercial properties are for those properties that aren’t yet on the market listed, but are still for sale. How do you find these as a buyer? The broker you pick has to do this for you. So, make sure you pick a good one that knows how to find the properties like these that aren’t currently listed but are either still for sale or properties that an owner would be willing to sell.

3. You have to get prequalified and make sure that you are set to go when you find the right property. This will also help you in your search to know exactly what you can and can’t afford and/or what you need to target your buying search for.

4. Your broker has to set up search parameters and alerts for the online sites like Loopnet and CoStar so that, if and when a property is listed for sale that meets your criteria, you know about it the same day it happens. I can’t tell you how many times my buyers have simply been able to complete a purchase because I was able to show them the property immediately when it became available and we got to it first and were prequalified already as per #3 above.

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

Feel free to contact me for help on these matters at 805-217-0791 or david@djmcre.com