Edito et opinion

Navigating operating expense obligations in the post-pandemic world 

Watch out for COVID-19 “hot spots" in this year’s operating expense service charge pass throughs to tenants and how to effectively manage them.

The economic effects and implications of the COVID-19 pandemic are far reaching. The closure of office buildings around the globe and the implementation of remote working impacts operating expense reconciliations for 2020 expenses. Landlords will incur increases in certain costs, with likely offsets to others due to mostly vacant buildings during the crisis period. It is vitally important for businesses to carefully consider the various ways COVID-19 will impact their real estate operating expenses in the foreseeable future.

Be aware of COVID-19 “hot spots”

Here are details about what you can expect to be different in this year’s operating expense service charge pass throughs to tenants. Known as COVID-19 “hot spots,” you should be aware of the items below and how they may impact your real estate operating expenses.

Landlords likely experienced cost decreases, driven by low occupancy, for the following:

  • Prepayments
  • Parking rent and maintenance cost
  • Rent abatements and deferrals affecting other charges
  • Building administrative
  • Reduced utilities
  • Unused services typically included in CAM expenses

Landlords likely experienced cost increases, driven by high cleaning costs and social distancing, for the following:

  • Cleaning/disinfecting materials
  • Higher frequency cleaning
  • Security
  • Face masks/testing resources
  • Insurance costs
  • Costs related to re-entering workplaces, including implementing social distancing plans and other landlord projects

We don’t expect any changes to annual building maintenance costs and non-impacted operating expense.

Managing expenses related to “hot spots”

How do these “hot spots” affect your expenses and what’s the best way to manage them? Desktop audits and full/field lease audits can help you to effectively manage your rental obligations and review operating expense reconciliations.

Desktop audits include a review of lease terms to ascertain what rents and operating expenses are legitimately charged, in addition to verification of lease stipulations against financial documents (rent demands, invoices, service charge reconciliations).

We also identify out of line items and unusual increases, and perform trend analysis of yearly reconciliations to analyze year-over-year variances. With desktop audits, 100% of cost savings and avoidance is passed back to you.

Lease audits, sometimes referred to as full or field audits, differ from desktop audits. They leverage negotiated audit rights in the lease that allow the tenant to audit the landlord’s books and records.

The audit, completed by a specialist lease audit team, reviews all leasehold obligations resulting from the landlord-tenant relationship – not just the operating expense pass throughs. The audit includes third party invoices, contracts, management agreements, property taxes/rates, insurance policies and premiums, and could require an onsite visit to the landlord’s office.

Contact us today to learn how we can help you to navigate operating expense obligations.

Bogumila Arkita
Global Lease Audit Sales lead
Bogumila.Arkita@eu.jll.com

Dana Harvey
Global Sales Leader, Lease Administration
Dana.Harvey@am.jll.com

Elayna Kotsaftis
Lease Admin & Lease Audit Sales - U.S. North
Elayna.Kotsaftis@am.jll.com

Ronnie Vagnone
Lease Admin & Lease Audit Sales - U.S. South
Ronnie.Vagnone@am.jll.com