If your 2021 operating/CAM reconciliations have started coming in, the topics in this article will be helpful for you to keep in mind during your reconciliation review. The pandemic and other events of the past two years prompted us to take a closer look at several expense categories. Building occupancy, supply chain issues, inflation and other factors have all impacted these expenses. Reviewing your annual operating/CAM expenses allows you to verify if they are staying in line with expectations. This article explores how several expense categories have changed since the COVID-19 pandemic began.
Utilities: Utility charges might have been lower in 2020 and 2021 than in previous years due to the number of remote workers. In 2021, there were more people working physically from offices, but it didn’t reach pre-pandemic levels. Lights did remain on in common areas and costs were incurred for heating and cooling throughout the year, regardless of tenant volume. Water usage, on the other hand, should have been less than in pre-pandemic years as physical occupancy was lower.
Janitorial & Trash: Janitorial & Trash expenses have been interesting to review for 2020 and 2021. Lower tenant volume should mean office buildings generated less trash and used fewer paper products. Conversely, additional precautions and cleaning regimens implemented in buildings increased the cost for cleaning supplies in common areas.
Security: Because physical occupancy in buildings was low, fewer occupants also meant fewer non-security personnel who might report a potential or actual issue, possibly resulting in increased security resources and costs. Industrial property security was further increased in some cases due to authorized and unauthorized trash dumping and other concerns. Civil unrest and smash-and-grab events in large cities have also led some retailers to board up windows and take additional measures to protect property and inventory. Depending on the property and location, tenants may see changes in their expenses that correlate with these events.
HVAC: The pandemic caused some landlords to undertake additional HVAC projects to increase air filtration in their buildings. Expenses for these projects may be recorded by a landlord as a capital cost, though they may also appear on the landlord’s books as additional or extended maintenance expenses. Your lease will state whether costs of this nature are allowed.
Insurance: Commercial property insurance rates have increased significantly since 2020 began. Aside from increases related to COVID-19, there are several other underlying reasons for additional insurance costs. Riots and civil commotion in 2020, smash-and-grab thefts that occurred in major cities in 2021, hurricanes, wildfires, floods, supply chain shortages, and inflation have all affected the rates that commercial property owners were charged by their insurers. This translates to higher costs passed through to tenants by their property owners to the extent allowed per the lease agreements.
Property Management Fees: The assessment of property management fees can vary from landlord to landlord. Some may base the property management fee on the individual tenant’s rent and additional rent paid, others may charge a percentage of the income from the entire building, and others may charge a flat rate. Many landlords granted rent abatements to tenants in 2020 when businesses had to be closed due to COVID-19. This would reduce the management fees collected by the landlord in that year, but also show a higher-than-normal increase in the 2021 management fee. This information will not be easy to see on your typical reconciliation statement. However, many landlords will provide the back-up to this specific category, if asked.
Capital Expenses: Did your landlord begin but not finish (or not even start) planned refurbishment or upgrades to your building during the pandemic? Many projects were delayed or cancelled due to heightened health precautions, labor shortages, supply chain challenges, and inflation. Separately, uncertainty in the economy may have caused some landlords to reduce project spending to have funds available for future unknown and unexpected expenses.
Base Years: Do your leases include a base year provision? Among several base year issues, calculating grossed-up variable expenses will be tricky. If a building was considered fully occupied based on leases in place but few people were physically in the building using building services, variable expenses should inherently be lower than a typical year. What is a fair and reasonable methodology to apply to reflect the expenses of a fully occupied building? This is a concern driven by remote work and government shutdowns, and most leases don’t take this dynamic into consideration. Tenants will have to be diligent in reviewing these calculations to ensure fair expenses are included for their base and comparison year amounts.
There have been many changes since the pandemic began – building occupancy, supply chain issues, inflation, and others – and commercial real estate costs have been affected accordingly. These widespread issues resonate throughout the various categories of CAM expenses. If your expenses have changed significantly, contacting your landlord to request additional information will help you better understand any unexpected increases or decreases. We hope the information in this article is helpful to keep in mind while reviewing your 2021 CAM expenses.
Scribcor Global Lease Administration has lease administrators and lease auditors who have years of experience completing both desktop and on-site audits for operating expense and CAM reconciliations. If you would like to ensure you are not overpaying for your lease obligations, we can help! Contact us today!