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Monday, May 23, 2022

Tenants Face Soaring Operations Costs

Tenants Face Soaring Operations Costs


Staff Reporter

Office building landlords have two words for their tenants: Brace yourselves.

In the coming weeks, they will be sending out operating bills for 2001 tallying the difference between prepaid and actual costs. And with unforeseen events like the Sept. 11 attacks and the utility crisis throwing a wrench into pre-’01 operational estimates, the differences are likely to be steep.

An office tenant taking 25,000 square feet could receive a bill of as much as $25,000, depending on the building’s location.

“You’re going to see a lot of angry tenants once they see their pass-through statements,” said Rick Buckley, senior managing director at Insignia/ESG Inc.

The adjustments involve tenants with triple-net leases those that pass along operational costs like electricity, taxes, insurance and security. Triple-nets, the most common form of office lease, generally estimate pass-through expenses based on the previous years’ costs, with adjustments to make up any difference.

The most obvious expense will be in security measures, which were bumped up over the last 15 weeks of the year and ranged from a handful of guards at some buildings to full-scale revamping of access and parking procedures at others.

A tenant in a lower-profile, non-downtown building like Wilshire Courtyard could pay as little as an extra 6 cents a foot, according to Toliver Morris, leasing director for McCarthy Cook & Co., the building’s landlord. But for a higher profile downtown property, that figure could jump to 20 cents a foot, said Dan Gifford, partner at MaguirePartners, which owns and manages 6 million square feet downtown.

As a result, a tenant occupying a typical, 25,000-square-foot floor could get a $5,000 bill for added security costs alone.

Also bumping operational costs are insurance rates that had been increasing even before Sept. 11, according to Alexandra Glickman, managing director for insurance brokerage Arthur J. Gallagher & Co.’s real estate and hospitality services division.

“The market for property insurance was already starting to harden,” said Glickman. “People were looking at increases at 20 to 25 percent over the previous year. Then 9-11 shows up.”

As a result, the real effect on insurance-related pass-throughs won’t be felt until the end of this year, when the $50-$90 billion paid out for Sept. 11-related claims could cause rates to double the 25 to 30 cents a foot tenants had been paying.

Gas bill

The bill for last year’s energy crunch will come due this year for tenants in buildings outside L.A. Department of Water and Power and other municipal power agencies.

But even buildings served by municipal utilities in Glendale, Burbank and Pasadena were still hit with added costs from the increase in natural gas prices. Because of this, annual utility expenses for Tri-Cities buildings rose 25 cents a foot, to $2.20 in 2001, according to Cindi Langendoen, a Cushman & Wakefield Inc. assistant director.

On the Westside, particularly Santa Monica, with its less energy-efficient low-rise complexes surrounded by landscaping, the difference is more pronounced. One landlord estimated that Santa Monica tenants could see bills reflecting a 30 to 40 percent increase in utility costs.

While the utility-related bump is probably temporary, the effect of increased security and insurance rates is likely to continue over the next few years. Most real estate insurance policies have been adjusted to exclude acts of terror since September, forcing landlords to take on, and ultimately pass through to tenants, terrorism insurance costs that can run from 2 to 75 cents a foot, according to Glickman.

“From a tenant’s perspective, there’s sort of nothing to negotiate,” said real estate attorney Anton Natsis, partner with Allen Matkins Leck Gamble & Mallory. “Do you really want to tell a landlord, ‘let’s go cheap on security?'”

With security, the long-term effect on pass-through expenses will vary. With card access systems and “optical turnstiles” in lobbies, tenants in MaguirePartners-operated buildings like the Gas Tower and the KPMG Building can expect annual security pass-through expenses to be up to 60 cents a foot higher than 2000 levels.

“What we’ve found is that the (lead tenants) unanimously approved of the updated security program,” said Gifford, who acknowledged that some tenants would complain about the extra costs. “It’s virtually impossible to have people agree upon everything.”

Other downtown buildings have taken a less aggressive approach.

“Some buildings are going ahead with these costs, but others have loosened up on security, with managers saying it’s expensive, nothing has happened and it’s an inconvenience to us,” said Langendoen. “We’ve seen a wide gamut.”

All told, a tenant in a low profile building in Los Angeles could face as little as 10 cents-a-foot more for security, insurance and utility increases, while total operating expenses jumped 36 cents a foot for the typical downtown high-rise tenant, said Langendoen.

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