Management Fees On A Nnn Lease

[Elroy]

i am in my second month of a new 10 year lease agreement in a new 4 unit strip mall. the landlord has already increased my triple nets. the lease states that i am responsible for my proportionate share of 25% of the operating expenses. operating expenses is defined as the expenses incurred by the landlord in the operating, management and maintenance of the building and site and shall include taxes, utilities, insurance, landscaping, snow removal, management expenses and fees. the landlord is billing me a management fee based solely on my rent times 6% and also a management fee on a 2nd mortgage at 6%. because of the wording of my agreement i know i am responsible for management expenses however i feel they are a bit excessive. it is my understanding that the management fee is based upon the total rent generated by the building at 4 or 5% then i would be responsible for 25% of that. also the landlord is pre-billing for misc. cost for loose ends. can he do that?

thanks for any insight

[Kalil]

Steven-

In the last six to eight years it has become standard practice for tenants to request and include in their lease extensive detail defining more PRECISELY the component costs that will be included under the headings of generic "Net" costs like "Management and Maintenance of the building and site and shall include Taxes, Utilities Insurance, landscaping.....etc." that are listed in your lease as stated in your question.   Many landlord's become very inclusive of the costs they will include as Net, CAM or Operating Costs AFTER the lease is signed.

If you just started on a new ten year lease, it is imperative that you immediately challenge the costs that your landlord is assessing to you if you believe they are excessive.   Once you have paid for costs for and extended period that you believe are incorrect, it becomes more difficult to have such charges corrected.

You should tell your landlord in written correspondence via certified mail that you believe your "triple nets" cost may be incorrect and you wish to AUDIT the supporting documents that verify that the costs that have been billed to you are accurate and appropriate.  Often tenants have this "right to audit" specifically included in the provisions of their lease where this right would be needed.  If you do not have this right included in your lease now, this does not exclude you from doing so, it might however make it more difficult to force your landlord to make this bookkeeping and other records available to you.  Contact your attorney in this regard.  You will need to determine if it is cost effective for your to go forward with this audit.   Include the cost of overpaying for these costs for the next nine years of your lease in your considerations.

You will probably need to prove that the landlord's 6% management fee is excessive.  You will need to see a copy of the landlord's management contract to identify the list of management services that are provided to the landlord for the six percent(6%) fee.  You will also need a experienced property manager or other authority evaluate the fee versus the services to tell you if the charge seems appropriate on excessive.  Additionally, you cannot simply find out the percentage fee that is paid for management services at other retail properties because a four percent(4%) fee paid at two other contiguous properties for management fee may actually be for more, or fewer, services than your own landlord is provided for six percent(6%).  You must compare apples to apples.  Also, and for example, you may find that the 6% management fee includes preparing the landlord's tax returns each year.  This is a highly questionable service to include in the fees reimbursed by tenants leasing the property - but it is often included because the landlord doesn't expect that the tenants will ever have the opportunity to audit the management contract.  There are hundreds of other inappropriate costs that could be included that you may need to challenge. You will find that at some point, if you challenge the fairness of a six percent(6%)management fee, you will need a detailed comparison of the fees and services paid at other similar properties like yours.  

I find the assessment of a six percent(6%) fee on a second mortgage laughable - in addition to being unjustified as a tenant reimbursable cost.  If you signed a lease that includes such a cost as part of your reimbursable costs, you must then pay the charge.  I hope you are incorrect about this charge.

If you had a broker assist you in the acquisition of this lease, you should contact the broker to ask them why they did not advise you to correct all the flaws that are still included in your lease that your broker should have demanded be changed before you signed the lease.   If you didn't have a broker assist you with the lease, you may end up paying far, far more for excessive "triple nets" costs over the next nine years of your lease than a broker's fee would have cost you.    

Pre-billing for miscellaneous costs can only be billed to you outside of your regular annual, six month, or bi-monthly assessments if such a procedure is provided for in your lease.  If not, the landlord must include such costs along with the other charges at the time and manner the lease provides.        

Your inquiry suggests to me that you may need an attorney to advise you regarding this situation.  You should be certain to retain only a lawyer experienced in Landlord and Tenant Law, also called "L & T" law.  Do not use a friend or the attorney that handled your divorce or specializes in intellectual property to assist you.  Get an attorney that has solid experience in L & T law.  This is a fairly specialized legal matter and may require being able to prove "standard procedure" and "reasonableness" in the commercial leasing industry.

If you could break down and better quantify all of the economic charges, rental rates, etc. that are involved with your problem I may be able to provide you with a more specialized response.

Good luck.

-Jim