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It is not easy being a tenant of a commercial landlord. Commercial landlords negotiate leases every single day, but tenants only negotiate every 5 years on average. Here are 11 ways your commercial landlord may be making some extra money from you:
Is anyone surprised that the measuring standard used by commercial landlords is created by commercial landlords?
The condensed version of what you need to know about measuring a building is that your space within your suite is not the square footage you pay rent on. You pay rent on that, plus your fair share of the other areas of the building. It used to be that landlords did not factor in the ground floor lobby area when assessing your square footage.
Guess when that changed?
In 1996, when rates were very tenant-friendly.
The real problem with the system however is that tenants really have no recourse on challenging a measurement.
Are you really going to hire a space planner and pay them $1,000 to laser measure the ground floor lobby, the common hallways on the floor of the suite, the washrooms, mechanical rooms, etc?
This puts the commercial landlord in an advantageous position...tenants just have to take their word for it. Most tenants think they will be protected by their broker, but in many cases the broker just wants to get the deal done?and a higher square footage actually means a higher commission.
Most offers to lease state the current year's estimated additional rent, and include a list of items that will be included in that calculation. The problem is that most offers to not state what will be excluded.
Does it include items like real estate broker fees? Late penalties? Marketing and advertising expenses? Legal fees? Costs related to the landlord's financing? Non-competitive payments to vendors? Contributions to charitable organizations? Any expense reimbursed from any source? Capital costs?
There should be a clause in your lease that states that the landlord will charge additional rent in according with the building being 100% occupied.
In other words, if you rent 5% of the building you will always pay 5% of the cost to run the building. We have seen cases in which a landlord loses a tenant and then spreads that tenant's share of additional rent to all other tenants, instead of absorbing those costs.
While a commercial landlord would not be able to realistically do this if you occupied 5% of a building and one other tenant occupied 95% and left - that increase would be much too ridiculous. But in the case of 2-3 small tenants vacating and their additional rents being spread amongst the remaining tenants is a much more under the radar way of recouping what would otherwise be a loss for a landlord.
When is your $30 per square foot tenant improvement allowance not $30 per square foot? When it is only $28.50. Most landlords will attempt to charge a 5% fee to supervise your construction.
Granted, engineers are typically called upon to inspect your contractor's work and ensure that you are not adversely affecting the building systems for other tenants in building. But $1,500 on a 10,000 square foot space as an example may be a little excessive for an engineer to do a 10 minute walk through to ensure that all the drywall has been erected as per the plan you provided.
A 5% charge for a landlord's overhead is normal. Realty taxes are an odd duck however. They typically represent a high percentage of the additional rent and it is just a bill the commercial landlord pays on behalf of the tenants and then passes along the cost.
Take the case of a 500,000 square foot office building in which the realty taxes are $12 per square foot. The total realty tax for the building is $6,000,000 and if every tenant paid their 5% for the pain of paying that tax, it amounts to $300,000 annually for the landlord.
Basic human psychology dictates that when you receive a check from the landlord for over paying your additional rent, TMI or CAM charges, you are happy. You feel like the landlord was honest about receiving too much money.
In reality they charged you too much during the year and are just returning what is already rightfully yours. While this is normally not their fault (it can be difficult to pinpoint some variable costs), if this is a predictable pattern, then your landlord is likely overcharging and treating the money like an interest-free loan.
Think about when you will eventually vacate your premises. It likely will be halfway through the fiscal year for the commercial landlord. When you are long gone and the landlord determines you over paid for the portion of the year that you were in the building, do you think he is going to mail you a check for the overage?
If you toured a model suite during your visit to the building, you probably viewed a beautiful example of what can be done to the actual space you are interested in. Most landlords however spend top dollar on the finishes within the model suites and end up using less expensive finishes when building out actual spaces.
You would have paid for the more expensive finishes as the landlord would let your broker or you know what was spent on the model suite and your rental rate would reflect those level of finishes. Ensure you are not sold the Cadillac and the landlord provides the Pinto by being very detailed on the scope of work to be done.
One way to circumvent this is to simply negotiate a leasehold improvement allowance and you can spend the money yourself to build your space.
Although it is a minor point, most offers to lease state that the commercial landlord will install all tenant signage and it will either be at the landlord's cost or the tenant's cost. In most cases the tenant agrees to pay for their signage. Also in most cases the landlord charges all signage back to building operating costs.
Avoid this double dipping by the landlord by having them install and pay for your signage (you end up paying for it anyways through operating costs...this just ensures you only pay for it once).
This is a detail usually not discussed during the negotiating phase. Let's say you have 50 employees and they each need a building access card. Some landlords charge $50 per card. It is excessive to have to produce $2,500 for 50 pieces of plastic.
What's more is that by the time your lease (and any extensions) come to an end, you may have forgotten about the deposit and may walk away from that money - years after providing it.
Although it is fair to pay for your use of heating, ventilation and air conditioning during non-business hours, many companies are in the same boat. Not many leases allow for a discount if another tenant is utilizing the after-hours HVAC at the same time you require them.
In theory, every company in a building could have employees working at 2pm on a Saturday and will all be charged the standard after hours HVAC charge and the commercial landlord is making a huge margin by charging all the tenants at the same time.
Of course you should pay your rent on time.
But a 5% penalty on a $10,000 rental payment is a healthy margin if your check is 1-2 days late and there is no additional work to be required by the commercial landlord. It may be advantageous to have a sliding scale penalty...for instance a small percentage for the first offense, or a small percentage for 1-2 days late, with a higher percentage for a longer delay.
Tenants take for granted the services that should be offered within the operating costs of a building.
One such example is when a commercial landlord specifically charges for a service that is unexpected...like the use of a moving elevator. Some landlords will employ a security person to supervise a move to ensure the common areas are not damaged during the relocation process. Although this makes sense, it can be a surprise cost to you, and it may also be a cost that the landlord is double dipping on.
Given that commercial tenants only negotiate a lease every 5 years on average and commercial landlords negotiate every day, there naturally is an imbalance favoring landlords.
While tenants are focusing on the net rent, landlords are ensuring they can make money in other areas. So tenants need to ensure that they receive expert commercial lease advice when negotiating a lease.