It’s important to understand whether you as the tenant, or your landlord, is responsible for paying for various veterinary clinic operating costs when it comes to the maintenance of the property. Your veterinary office lease plays a key role in dictating the obligations of both parties, and clarifying common grey areas.
What Are Operating Costs?
Operating costs are the expenses related to the operation of a commercial property. Some landlords have been known to take certain liberties in the operation of their buildings. They do so by charging expenses to their tenants, who may only be tenuously linked to the management and maintenance of the property in question. These particular landlords may pass these costs on to their tenants by including them in the “additional rent” or operating cost provisions of their standard form lease with little, if any, explanation.
What operating costs are included in your clinic’s rent, and what is being charged separately?
There are a number of factors regarding the landlord’s maintenance responsibilities and costs, they can vary depending on whether you’re presented with a Net Lease, Gross Lease, or Modified Gross Lease.
Type of Leases
Net Veterinary Office Lease
In addition to base rent, a Net Lease requires a tenant to pay for its proportionate share of all property expenses such as insurance, maintenance, utilities, repairs, and taxes. Typically, the landlord is not responsible for any expenses (with some exclusions) under the lease.
Fully Gross Veterinary Office Lease
This type of lease is similar to many residential rentals. In a Fully Gross lease, the tenant is only required to pay a flat rental rate, while the landlord covers all additional property expenses.
Modified Gross Veterinary Office Lease
During the first year (base year), a Modified Gross Lease requires the tenant to pay a flat rental rate. However, unlike the Fully Gross Lease, the tenant is responsible for their proportionate share of any annual increases in operating costs and taxes paid by the landlord. For example, if the landlord upgraded the lobby or common area washrooms in the last 12 months, you may see an increase in the operating costs reflected in your rent.
Given that this type of lease can vary dramatically (with respect to the allocation of operating costs), the details in your veterinary office lease should clearly define which expense increases become your responsibility, and which will remain the responsibility of the landlord.
Do You Know Which Operating Costs You’re Paying For?
A critical step in ensuring the successful and profitable operation of your practice is knowing where your money goes. While rental terms for the clinic are often the first thing discussed during the “offer to lease” stage and are clearly defined, operating costs or additional rental charges are often a grey area. It’s perfectly acceptable to request a detailed “statement of the operating costs” from your landlord to determine what and how you’re being billed. Upon closer examination of the breakdown, many veterinarians are shocked when they realize which “operating costs” they’ve been paying over the years.
To protect yourself, it is important to consider the following:
- Are you being charged for costs which should be paid by the landlord or other tenants?
- Do you know which services (i.e. utilities, insurance, etc.) your payments are covering, and to what extent?
- Is the landlord “double-dipping” by recovering costs directly from the tenant when work is completed, as well as through annual operating expenses?
- Is your landlord being totally transparent with work performed over the term of the lease? Are the amounts visible for you in a detailed annual statement?
- Does the landlord have the ability to “back-charge” you for expenses incurred in the past which were not previously billed?
While operating expenses may vary from building to building, some of the most common items included are:
- Maintenance and Repairs
- Employee wages
- Janitorial Services
- Building Security
- Snow Removal
Author: Magda Mroz, Lease Analyst, Cirrus Consulting Group
Click here to read Part 2 of our blog about veterinary clinic operating costs where we cover audit rights, exclusions, retroactive billing, capping these costs, and more.