Three tips to find “hidden money” in your real estate leases and contracts

A deep dive into lease contract language to protect your business

By: Claire Langland Johnson, Manager – Portfolio Services

I work in a niche of commercial real estate that is critical to business decisions but rarely top-of-mind. In my world of lease administration and portfolio services, we dig into the details. Really dig into the details.

Those details can range from reviewing termination language in one or 1,000 leases to verifying exclusivity language in a potential new lease. At the heart of what we do is help businesses save money on real estate leases and help them avoid paying more than required.

Some clients want to handle parts of the lease administration work. Others want to hand it off and forget about it because let’s admit it: it isn’t the most exciting part of real estate.

But our work can save money and minimize losses by digging into the specific language and terms of real estate leases and contracts to avoid costs, manage critical contract dates, and review operating expenses.

Here are some key tips to be aware of when reviewing your lease for important details.

#1. Don’t miss critical dates:  You’ll leave money on the table and/or close the door to the future.

Commercial lease contract language is complicated, considering operating expenses, maintenance requirements, and deadlines for extending, renewing, or terminating a lease. Whether a business has multiple locations or one location, we know our clients are hyper-focused on their operations and not on the deep details of contract language.

If your business is growing and needs more or different space, you’ll need to understand the deadline for notifying your landlord about your expected changes. Our clients have longer leases and may need more time than a standard office lease to consider a new location, build out the space, and move the clinic, equipment, and patients. Without attention to the critical dates, those clinics won’t have enough time to negotiate a deal that’s in their best interest. Traditional office users – law, accounting, or other professional services – tend to have shorter lease terms. Those end dates can sneak up on the business without having an advocate playing watchdog.

We also look for the financial penalties associated with early termination, or a request to renew or expand. In one case, the business missed a renewal option window and then asked about renewing. The landlord said, “Sure, but your previously negotiated renewal rate is no longer valid. Our rates have increased by 9%.”

Another way to find hidden money is in the tenant improvement (TI) allowance clause. If you don’t use it, sometimes you don’t lose it either. In one case, we were able to get a $500,000 payment to the tenant as rent credit because the language offered a credit or refund if TI expenses weren’t used. TI allowances can also be used for additional space improvements as long as the allowance expiration date isn’t missed.

The short-term consequences of missing critical dates are that the business will have to pay more to exit an existing lease and may have a shorter timeline to find new space. A long-term consequence could be forcing the business to renovate to operate within the existing space. If that happens across multiple locations, the costs increase substantially.

#2. Audits of operating expenses can uncover hidden costs.

In one instance, our client had employee turnover in their accounting team, which resulted in routinely paying invoices upon receipt without thoroughly examining the charges, including those not allowable per the lease terms. Those expenses exceeded $15,000 over 12 months and, once caught by our team, led to changes in their internal process for evaluating leases for future locations.

Using our software and tracking systems, we often perform a reconciliation audit, which compares monthly charges to what is allowed in the lease contract. In those audits, we often find improperly charged costs including pass-through incidentals like janitorial supplies, renovation costs to the common areas, management fees, or incorrect charges for when the building isn’t fully occupied.  

We’ve seen invoices for incidental cleaning fees for common areas, which are not allowed in most leases. In another recent example, there was a water leak in our client’s suite and the landlord sent an invoice to them for cleaning, even though, in this case, the lease dictated cleaning as a landlord expense.  In yet another case, our client was billed the incorrect pro rata share of the operating expenses and our review and identification of this resulted in a credit of more than $3,000.

We are not out to get landlords – but we like to make sure they aren’t out to get our clients even if it isn’t on purpose!

#3. The details and the fine print matter.

Most often, businesses can avoid extra fees included in a lease by being diligent and on time. In a lease with more than a hundred pages, most people pay attention to only five or six clauses. It’s the other 99 pages that we review.

In a recent situation, a client leased space in a building where the landlord was nearing default, so the lender was making the decisions. Once the tenant signed the lease, it became apparent that the common areas and amenities that attracted the business would not be available upon move-in. We identified the clause that required the landlord to operate those amenities and advised our client to cancel their lease and find a different property that better fit their needs.

I’m on a mission to educate businesses to understand their total lease obligation. By understanding the real cost of their space – including the operating expenses, tenant maintenance requirements, and the renewal, termination, or other options – businesses can make better long-term decisions, save money, and avoid extra costs.

Our work can be seen as akin to law enforcement. If the laws are on the books but no one is there to enforce them, what good are they?

If your real estate leases and contracts need reinforcement, the experienced Portfolio Services team at Forte Real Estate Partners can help you dig into the details and provide you with critical data and tools for decision-making that is specifically tailored to your business.  Contact Claire for an evaluation of your real estate contracts.