Commercial real estate contracts for leasing are very complex and often difficult to analyze. Unfortunately, unscrupulous landlords may use this to their advantage, folding in costs that make occupying a space more expensive for tenants. To ensure that you're not being assessed unnecessary charges, keep an eye out for the following hidden costs:
1. Large Insurance Deductibles
While tenants should be expected to pay portions of the landlord's insurance costs as a part of their common area maintenance (CAM) fees, caps should be placed on insurance deductibles. Some types of property insurance, such as earthquake insurance, can have astronomical deductibles. Ensure that your lease agreement spells out a limit on the amount that you can be charged through CAM if your landlord is forced to file a claim on any type of property insurance.
2. Improvement and Maintenance Costs
Improvement and maintenance-related costs are also typically figured into CAM, but language should be inserted to protect tenants from sudden, huge costs or unnecessary upgrades. For example, if a building is inspected and found not to comply with accessibility requirements mandated by the Americans with Disability Act, landlords could have to pay tens of thousands or even millions to bring the property up to code.
A clause that stipulates that tenants are not liable for any fees for improvements that the landlord should have made to comply with laws and regulations can protect you from being assessed a portion of these costs. In addition, leases should spell out that mere cosmetic improvements like purchasing new artwork for the lobby should not come out of tenants' pockets.
3. Load Factor
The load factor is another area of the lease where the landlord can try to assess tenants over-the-top costs. All leases include a load factor, an amount that is added to the square footage to account for square footage located outside the office space that a tenant rents. Be sure to ask landlords for the equation used to calculate the load factor to ensure that it is being assessed fairly. Landlords should be using the same load factor for each floor of a building or adding on square footage that is not actually shared or usable, such as areas under outdoor overhangs.
4. Taxes
Property taxes are passed along to tenants as a common practice, but as with insurance, there should be protections in place to protect companies from a sudden increase in property tax rates. Cities and townships reassess property values periodically. If an office building is assessed at a higher value, subsequent tax payments will be higher. A cap on maximum increases can help to prevent a sudden dramatic spike in insurance payments through CAM. Keep in mind that reassessments can work in tenants' favor as well. If the building is reassessed at a lower value, the landlord's property tax costs will decrease, and tenants' insurance costs should in turn; however, landlords may not freely offer this information.
Make sure to stay abreast of reassessment status, know what the outcomes are and request a renegotiation if you find out the building received a lower tax assessment.
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