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Written By: William H. Brownfield, CRE, CCIM, EscalationAdvisors.com
If you’ve done it right, you’ll be able to explain things well enough so the tenants can sleep comfortably at night.
In the Introduction to this series, we suggested that a successful escalation season leads to two outcomes:
This part of the series is dedicated to helping you collect the money that you’re expecting the tenant to pay you for escalation charges. So far, you’ve read the leases (Part 1). You’ve done the difficult work (Part 2). And you’ve sent an invoice and backup information to the tenants (Part 3). It’s likely that most will pay after a few questions and then get back to their businesses. But other tenants will go beyond asking questions, get angry or suspicious when they don’t get answers, and hire auditors to root through your records before paying you a dime. Those are the tenants that we care about the most, and they are the ones you need to prepare for. Why? Because in many cases, they will be correct to question what you’ve billed them for.
That said, here’s everything you need to do to collect escalations: do the calculations correctly, in accordance with the lease. Beyond that, any collection issues are essentially an A/R problem rather than an escalation problem.
Keep in mind that this subject is about money and who should rightly pay it – so I’m going to take this opportunity to get on a soapbox and loudly proclaim a personal comment:
I am constantly amazed at how little time and attention many commercial property owners and upper management personally give to escalations, or to the methodology used to calculate operating expense escalations.
I believe that if the reverse were true – meaning if owners and upper management paid as much attention to escalations and escalation methodology as they do to, say, negotiating the terms of their mortgages – then the volume of tenant expense audits would almost disappear and tenant satisfaction surveys would soar (especially if the tenants’ CFOs were polled). Why do I believe that owners and upper management don’t pay enough attention? Because we frequently see the results of escalations calculations gone awry. We are retained by landlords and tenants to help sort things out when they get into escalation disputes. Considered by itself, that might mean we are looking at biased data, seeing only the car wrecks and ignoring the other cars whizzing by. But over the past 25 years, we have also taken over many hundreds of occupied office properties across the country, and been exposed to many strange and unusual leases as well as their escalation methodology. Want a rough estimate of how many did a credible job with escalations? Answer: Less than 50%. Keep in mind that I’m only speaking in generalities here, not about measureable data, but just anecdotal evidence. Regarding the magnitude of errors, we suspect (or hope) that they come close to balancing out overall, but that’s beside the point. There’s no doubt that I’m wrong about the 50% to some degree, but if I’m only half-right, the resulting number is still huge.
Since I’ve defined a problem, I have a responsibility to try to measure its scope or scale and to also recommend a solution. I’m pleased to present both in next week’s final column, though I will apologize in advance for using a lot of chicken wire and duct tape.
If you’ve done it right, you’ll be able to explain things well enough so the tenants can sleep comfortably at night.
In the Introduction to this series, we suggested that a successful escalation season leads to two outcomes:
- You correctly billed your tenants for their share of operating expenses and taxes (meaning in accordance with each tenant’s lease requirements), and...
- Your tenants trust your invoices enough to pay you what they owe
- Both the tenant and the landlord know that the escalation charges and collections were done in accordance with the lease
This part of the series is dedicated to helping you collect the money that you’re expecting the tenant to pay you for escalation charges. So far, you’ve read the leases (Part 1). You’ve done the difficult work (Part 2). And you’ve sent an invoice and backup information to the tenants (Part 3). It’s likely that most will pay after a few questions and then get back to their businesses. But other tenants will go beyond asking questions, get angry or suspicious when they don’t get answers, and hire auditors to root through your records before paying you a dime. Those are the tenants that we care about the most, and they are the ones you need to prepare for. Why? Because in many cases, they will be correct to question what you’ve billed them for.
That said, here’s everything you need to do to collect escalations: do the calculations correctly, in accordance with the lease. Beyond that, any collection issues are essentially an A/R problem rather than an escalation problem.
Keep in mind that this subject is about money and who should rightly pay it – so I’m going to take this opportunity to get on a soapbox and loudly proclaim a personal comment:
I am constantly amazed at how little time and attention many commercial property owners and upper management personally give to escalations, or to the methodology used to calculate operating expense escalations.
I believe that if the reverse were true – meaning if owners and upper management paid as much attention to escalations and escalation methodology as they do to, say, negotiating the terms of their mortgages – then the volume of tenant expense audits would almost disappear and tenant satisfaction surveys would soar (especially if the tenants’ CFOs were polled). Why do I believe that owners and upper management don’t pay enough attention? Because we frequently see the results of escalations calculations gone awry. We are retained by landlords and tenants to help sort things out when they get into escalation disputes. Considered by itself, that might mean we are looking at biased data, seeing only the car wrecks and ignoring the other cars whizzing by. But over the past 25 years, we have also taken over many hundreds of occupied office properties across the country, and been exposed to many strange and unusual leases as well as their escalation methodology. Want a rough estimate of how many did a credible job with escalations? Answer: Less than 50%. Keep in mind that I’m only speaking in generalities here, not about measureable data, but just anecdotal evidence. Regarding the magnitude of errors, we suspect (or hope) that they come close to balancing out overall, but that’s beside the point. There’s no doubt that I’m wrong about the 50% to some degree, but if I’m only half-right, the resulting number is still huge.
Since I’ve defined a problem, I have a responsibility to try to measure its scope or scale and to also recommend a solution. I’m pleased to present both in next week’s final column, though I will apologize in advance for using a lot of chicken wire and duct tape.
