Tenants Brace for Surging Office Operations Costs

Tenants Brace for Surging Office Operations Costs

By DANIEL D. WILLIAMS

Bills for California’s energy crisis and fallout from Sept. 11 are coming due for Orange County office tenants.






In March, landlords started sending out bills to tenants for operations costs tallying the difference between prepaid and actual costs for utilities, insurance, security and other items. In a normal year, the bills are marginal. But 2001 was anything but normal.






“When some tenants get that bill, there will be sticker shock,” said Tom McAndrews, chief executive of Irvine-based property manager Tiarna Real Estate Services Inc.






Tenants with so-called triple-net leases,those that pass along operational costs such as electricity, taxes, insurance and security,are set to bear the biggest brunt, real estate sources said. Landlords saw big jumps in electricity costs early last year, while security and insurance expenses jumped after Sept. 11.






“No one has their head stuck in the sand,” said Dave Rock, senior vice president of management services for the Irvine office of Chicago-based Transwestern Commercial Services. “Emotions ran high after Sept. 11, so tenants were agreeable to pay more for security. But how long will that last?” Tenants are in for a double-whammy. Along with a bill for added 2001 expenses, most are seeing their monthly payments for 2002 operating expenses skyrocket.






In one Irvine high-rise owned by Chicago-based Equity Office Properties Trust, monthly operating expenses for a 10,000-square-foot tenant went from $85 a year ago to $1,200 this year.






Landlords base cost hikes on a tenant’s base year, or when a lease was signed. In the case of the Irvine tenant, 2002 operating expenses are estimated at $2.8 million, or 30% higher than the tenant’s 1999 base year.






The key is knowing the big bills are coming. One Equity tenant, Charley Hurst, a partner with the Irvine office of Snell