Quick Tip for Commercial Real Estate Tenants: Capping Controllable Costs Under a Commercial Lease
When negotiating a commercial lease, one key aspect tenants should consider is negotiating a cap on controllable costs. A cap on controllable costs limits the amount by which certain operating expenses can increase annually, providing tenants with predictability in their budgeting and protection from unexpected cost spikes.
What Are Controllable Costs?
Controllable costs are operating expenses that the landlord has some degree of influence over. These typically include:
– Maintenance and Repair Costs: Costs associated with routine maintenance, repairs, and upkeep of the property.
– Landscaping and Janitorial Services: Expenses related to maintaining the building’s exterior and common areas.
– Management Fees: Fees paid to property management companies for overseeing the property’s day-to-day operations.
– Non-Union Labor Costs: Labor expenses not bound by union agreements, where the landlord can negotiate wages and terms.
A cap on these controllable costs might limit the annual increase to a certain percentage, such as 3-5%, ensuring that tenants aren’t faced with unexpectedly high costs year over year.
What Are Uncontrollable Costs?
Not all expenses can be capped. Uncontrollable costs are those that the landlord cannot easily influence, and they are generally excluded from the cap. These typically include:
– Property Taxes: Taxes levied by local governments, which are beyond the landlord’s control.
– Insurance Premiums: Costs of insuring the property, which are subject to market conditions and not easily predictable.
– Utilities: Charges for electricity, water, gas, and other essential services, which can fluctuate based on usage and external factors.
– Union Labor Costs: Wages and benefits for unionized workers, which are typically governed by collective bargaining agreements and not subject to negotiation by the landlord.
– Snow Removal: Weather costs are unpredictable and the cost of snow removal can vary dramatically from year to year.
Why Negotiate a Cap?
For tenants, negotiating a cap on controllable costs is a way to protect themselves from unpredictable increases in operating expenses. By capping these costs, tenants can better manage their financial planning and avoid unexpected hits to their budget.
Landlords, on the other hand, must balance the need to cover their expenses with offering competitive lease terms. A well-negotiated cap on controllable costs can be a win-win, providing tenants with the cost stability they need while still allowing landlords to cover essential expenses.
In summary, understanding and negotiating a cap on controllable costs in a commercial lease can be a crucial step for tenants looking to maintain financial stability throughout their lease term. By carefully defining what costs are controllable and ensuring a reasonable cap, tenants can secure greater predictability in their operating expenses, making it easier to plan for the future.
