Sitting, as we are, in the northeast, with what seems to be a steady barrage of snow and ice storms, our thoughts naturally turn to “occupancy costs.” Before readers call for the white coated bearers of big nets to take us in, let us explain. But, first we’re going to Ruminate a little more.
At one time, the prices quoted by hotels and airlines could be held next to one another to find a good deal. No longer. Now, even they have “unbundled.” That would be fine if it were easy to “build and then price” your own travel package. But, it isn’t. [Want a pillow, a movie, and a hummus platter?]
Shop for a rental car today. Look at the web price and then get to the counter: “return the tank full; pay $9.00 a gallon; buy a tank from us at $3.35 a gallon; add a driver; return an hour late; and, it goes on an on.” When you go to ebay.com to buy something, be sure to sort by “price plus shipping.”
Now to leased space. The pricing system appears to be the same model as that adopted by airlines. The stated rent is similar to a published airfare in that both are only a starting point. With air travel, you then add-in the baggage fee, your snacks, and perhaps a seat that you can almost fit into. At least one airline has proffered a restroom charge. Want a pillow, there’s a price.
The comparison between the cost to rent a space and to travel on an airplane is far from perfect, primarily because when you fly, you can avoid some of the charges by not taking baggage or bringing your own food or pillow. When space is rented, you are faced with charges, above and beyond the quoted rent, for taxes, operating expenses, insurance, advertising, merchants’ associations, marked-up energy charges, rent tax, and more.
You can’t compare prices location to location by looking at the rents alone. It’s not just a difference between “net” leases and “gross” leases, whatever those terms might mean to you (because, they’ll mean something different to the person at the desk across the aisle). You need to look at what is called “Occupancy Cost.” Yet, all too often, we receive a negotiated Term Sheet listing the base rent and nothing more in the way of those “other costs.” Well, that’s not strictly true; our national and regional tenant clients often get estimates of those “extra” costs printed right on the Term Sheet. Some get operating expense histories.
But, woefully, the most vulnerable – small space, small budget – tenants rarely get that information and rarely ask for it. That is, they rarely ask for it before they get their first billing for “additional rent. Afterwards, it’s a different (sad) story. Why is that?
Ruminations thinks tenants and the brokers they work with should get this information right up front – at the time alternate rental spaces are being evaluated, i.e., when the Term Sheet is prepared. We also think that those who negotiate leases on behalf of tenants should insist on receiving a forward budget and historical cost information, and then pass that along to the prospective tenant. There isn’t any need to give advice beyond telling the recipient how to read the information.
Why does this thought come to us at this particular time? Well, there are three reasons, only one of which will tie in to our introductory remarks. First, this posting is timed to precede a national holiday, Presidents Day, and that’s a slow week for readers and their responses. A segment of our readership gets jammed up on the day after a holiday and set that week’s blog aside with the delusion that it will be read “later.” So, we’ve made it uncharacteristically short and less than ordinarily dense.
Second, we get a small, but steady stream of calls from tenants we never represented, coming to us on their own or sent to us by their attorney or accountant, asking us to figure out if their landlord is charging them for a proper item (and if the calculation was proper). In a large majority of cases, the billings are valid under the lease. Some involve what the tenant comes to view as a “trap,” but those were almost always anticipatable when the lease was negotiated.
Lastly, and here is the tie in, we and those around us are just plain tired of all the snow and ice we’ve experienced this year (thus far). Right now, it is the inconvenience and disruption. Later, however, it will be the snow and ice removal billings. We’ve never seen a cap placed on those costs and don’t expect to ever see one. Perhaps, an insurance-type product will become available and it will, for a constant multi-year premium, cover the cost of snow and ice removal. But, for now, tenants and landlords in the northeast, in the mid-west, and (to the consternation of some of them), in the southeast, expect a shock at reconciliation time. It occurred to us that we don’t know how to figure these extraordinary, though hardly unanticipatable, expenses into an estimate of operating costs.
What’s the take-away? If you are a tenant or represent a tenant, get those figures before the lease is signed.
As to more “substance” (in line with what Ruminations readers have come to expect), there is always next week (when we think we’ll be Ruminating about negotiating mortgage term sheets), and there are these blog postings from the past describing some unexpected issues found in “additional rent” items. To see them (possibly, again), click: HERE, HERE, HERE, and HERE.