Tips

295 Madison Avenue, Suite 1714, New York, NY 10017 | (212) 684-2044 | info@hcreadvisors.com

We take care of your real estate needs

Strategy

Ten potential liabilities hidden in your lease --

by addressing these issues, healthcare executives can turn their leases into tremendous assets

-- Real estate taxes. With the new year, it's likely that you have recently seen new real estate tax charges on your rent billings, or a reconciliation of the building's actual taxes with the estimates you've been paying -- or both.

It's surprising just how often these landlord tax billings contain errors, so you may wish to make a special review of any new or increased billings.

Another common error you'd be even less likely to notice is a building owner's failure to pass along a real estate tax refund to which you may be entitled.

Here are three simple steps you can take to better understand your tax bill:

▪ Obtain a receipt copy of your tax bill from your landlord

▪ Obtain an assessed value history from your local assessor

▪ Obtain a payment history from your municipal finance department

This information in connection with your lease will provide much of the information needed to verify a landlord's tax bills. Be aware that in some jurisdictions certain abatements and incentives may be accounted for separately and additional information may be needed.

-- Electricity. How much is added to your electricity bill? When electricity isn't directly metered, overcharges are common. If your electricity is submetered, negotiate for bulk-rate purchases. Try to ensure that your landlord's added administrative charges reflect actual work. Instead of metering, many landlords include a lump sum for electricity in the base rent. This amount is often deliberately set above normal office usage, to protect the landlord, and usually it's adjusted only up - even if rates go down. When your landlord bills this way, you may need an electrical consultant to determine whether the bills are reasonably related to your electricity consumption and your landlord's costs. Negotiate whether you or the landlord pays the consultant's fee.

-- Porter's wage, CPI and other indexed rent increases. While many healthcare tenants believe the porter's wage escalation is a straightforward index, it's just not so. As many as 18 different line items go into the calculation. No two medical building owners calculate these charges the same way.

-- Discretionary items in your operating expense bill. In many cases, healthcare space users are billed for discretionary items not reasonably linked to the cost of operating a facility -- salaries for the landlord's executives, legal fees and promotional expenses are some examples. These should be specifically excluded from your operating expenses.

-- Double-dipping. While a pass-through of actual operating expenses can be most favorable for tenants, it also permits landlords substantial discretion, and poses risk for even sophisticated healthcare businesses. As an example, landlords often bill twice for the same service by recharacterizing it, billing it to individual tenants and the facility as a whole, billing for the same item in two separate years and so on. Since each of these "twin" charges can be made to look slightly different. Personnel costs, repair and maintenance, and utility charges are just a few of the cost categories where landlords can pad bills at your expense - they're also among the biggest.

-- Alterations and improvements. Are you vulnerable to significant overcharges for alterations and improvements? Your landlord may require you to use resident contractors for your initial work in building out the facility to accommodate your needs or the work you do during your lease term, but bidding out work to general contractors is likely to bring you a better price. The tenant portion of the initial work can quickly reach $40 to $50 a foot for interiors that aren't lavish. So insist on the price protection of competitive bidding.

-- Insurance. Does your lease require you to carry too much insurance? Boilerplate insurance requirements may unnecessarily increase your lease costs. For instance, the lease may require you to insure alterations and improvements to your lease space. You may choose to insure those things you have paid for but you shouldn't be obligated to -- simply for your landlord's benefit.

-- What if you want to move before your lease is up? Though you may have decided to stay put now, the time will come when you'll be better off moving, and it's crucial that your lease gives you enough flexibility. Landlords often insist that they be able to recapture space if a tenant wants to sublet - eliminating your chance to profit from a rising market. But some leases can simply prohibit you from getting out altogether.

-- Wear and tear. Your lease should at least stipulate that you're not responsible for repairing normal wear and tear. Some landlords require tenants to "restore" their leased space when they leave. You shouldn't agree to such an arrangement. Since almost every tenant has needs that require modification of the space, restoring the space would cost you a lot without substantial benefit to the landlord. Chances are good that much of the restored carpeting, partitions, and so on will be torn out to modify space for the next tenant who comes along.

-- How big is the gap between the office or medical space you pay for and space you actually use? Chances are your rentable area includes not just your office, lab or medical space, but much more, including corridors, lavatories, utility rooms and a portion of the lobby. Space priced per "rentable" square foot often turns out to be much more expensive than healthcare tenants expect because landlords may include space that tenants consider unusable. Normally, you'll be able to use only 75% to 90% of what you pay for. This difference, the loss factor, depends on three things: the physical configuration of your offices, your landlord's method of measuring rentable area, and, increasingly, your landlord's whim.