An Accounting of Operating Cost

By Dirk Wollweber and Sonja Schröer

We are experiencing a time full of penalties for un-invested liquidity and ever-falling entry rates for all types of real estate investments, including those in large-scale retail real estate and shopping centers.

Against this backdrop, it is becoming increasingly important that investors, owners, and their asset managers think about how to get “honey,” i.e. a “return” or “performance,” when investing, even after all the footfall- and sales-related analyses and resulting classic asset management measures have already been taken.

Sometimes, more creative and progressive minds drop keywords like “re-positioning,” “customer group analyses,” and “customer-specific marketing.” Such measures take time before they are reflected in cash flow and they require a supplementary investment in advance, however.

Phrases like “ask our commercial object administrators” or “check for potential from operating and ancillary cost accounts,” are seldom heard in this context. That is a shame, because these areas have a significant influence on oft-neglected owner costs.

Anglo-American landlords as pioneers

Who wants to deal with operating cost accounts, especially with such complex items as those for a shopping center? As always in life, exceptions here confirm the rule. Anglo-American investors and “landlords” are pioneers of professional, quasi- or semi-academic “cost-side” surveys for optimizing positive cash flow.

We therefore listen to the experiences and advice of those who often stand in the shadow of landlords, center managers, and canvassers, who are all more used to the “spotlight.” Perhaps our readers will be spurred on by some ideas to deal with the topic for an hour or two and save a “few basis points” on owner costs…

First: Contract hygiene

Since this article can only provide some food for thought from a practitioner’s point of view and cannot and should not replace individualized legal advice, all that can be said here is that optimizing leases is an essential component in saving on operating and incidental costs.

Even though it may seem self-evident, adjusting leases in line with current jurisprudence, if necessary by means of addenda, is the first step towards success. Some people mistakenly stay on the contractual “safe side,” fearing annoying post-negotiations with tenants (“let sleeping dogs lie, or they’ll get stupid ideas”) or having the costs checked by a good external legal advisor or specialized in-house legal team.

When adjusting or editing contracts, one should not look solely at regulating operating costs, but should instead keep the purview as comprehensive as possible. The following areas deserve particular mention:

• Coverage of maintenance and repair costs for common areas and installations. There is no agreement on the level of coverage. Between 5 and 10% of net rent is generally applied, whereby a high percentage is obviously favorable for owners and investors.
• Formally agreed center management costs are ineffective because they are insufficiently transparent. The activities covered by the term “center management” must be broken down in the lease agreement in order to enable the cost to be leveraged.
• Landlords often make arrangements with attractive anchors that result in relief for the tenant but additional burdens for the landlord. Though it’s often hard to avoid in individual cases, the recommendation remains: as few special arrangements as possible. Idea: Purposefully incentivize your letting team, not only according to concluded contracts or gross rents, but also for “apportionable costs.”
• High ownership costs are often the result of ancillary cost contracts set too low. Long-term leases often lack a provision for adjusting these payments.

Second: Technical requirements for consumption-dependent billing

The most abstruse stories can be heard on this subject. People seem at times to give little or no thought, whether it’s during the planning, operation, or conversion of a property, to installing and making accessible counters that enable the collection of tenant-specific consumption data.

There are therefore still newly completed commercial properties that were planned without such counters able to differentiate between rental units and tenants. This is perhaps acceptable in a single-tenant building, but even that can change from one day to the next. Worse still, the technical prerequisites that would make a retrofit possible are often also lacking.

Another issue is that the counters, if available, are often difficult to access, languishing in the dark depths of the building’s interior or installed in places unreachable without technical equipment or tools like or personnel lifts. One simply avoids reading the meters and makes approximate calculations based on area.

This makes owners extremely vulnerable. After all, German heating regulations, for example, require landlords to charge tenants according to their use. If this is not done, owners may be hit with an additional 15% for heating and hot water costs. Our range of experience: no counters, incorrectly allocated counters, inaccessible counters, incorrect counter values, reading errors, and incorrect reading time stamps. Don’t try to save money by cutting technical staff on site!

Third: Structure and content of the accounting and billing system

Here, too, people often save money in the wrong places and rely on rather meager tools. Using professional billing software aligned to the real estate industry will ensure that statutory requirements regarding the billing structure are fully taken into account. These include, the total costs, the billing period, and the distribution quantities. If the accounting does not comply with these legal requirements, it is formally contestable.

Conclusion: It’s better to spend a little more money for good software, well-trained staff, and consultants and to let your technical counters show. After that, success in optimizing ownership costs will come easy and significant basis-point savings can be had depending on the circumstances—in exceptional cases even generating a “double rent.”

About the Authors

Dirk Wollweber is Managing Partner at TREC Real Estate Consulting GmbH in Düsseldorf. Sonja Schröer is Property Manager at TREC. Sylvia Nowrocki, Property Manager at TREC, and Inga Wunsch, Asset Manager at TREC, also contributed to this expert article.

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