Melissa A. Hazlewood, LEED Green associate vice president of management services at Franklin Street

MIAMI—There are any number of mistakes commercial real estate landlords can make. Some, of course, are more costly than others. GlobeSt.com caught up with Melissa A. Hazlewood, LEED Green associate vice president of management services at Franklin Street, to get her thoughts on this topic in our exclusive interview.

GlobeSt.com: What are property operating expense recoveries and why can mishandling them be such a costly mistake?

Hazlewood: Operating expense recoveries are different for each industry sector—office, industrial, retail and residential. So it is imperative that property managers understand each sector and how a proper recovery application is administered.

Regardless of the sector, all assets have operating expenses and the leases outline who is responsible for paying. Mishandling these recoveries can turn what is intended to be a successful investment into an underperforming asset or portfolio, as recovery income can account for a material portion of the expected revenues.

GlobeSt.com: How often do property managers miss seeing cost-cutting opportunities?

Hazlewood: It is more prevalent than it should be and can be found in simple calculation errors to mishandling gross ups, misunderstanding caps and combining expenses versus separating. For example, real estate taxes should never be combined with operating recoveries if the lease allows for separation.

GlobeSt.com: Give us an example of a property owner that was unaware they were leaving significant money on the table.

Hazlewood: I believe that cost-reducing capital expenditures, which are recoverable, are the most mishandled recovery expense. Even if calculated correctly, most will include the calculation in a base year amount. Capital amortizations should always be handled outside of the base year calculation.

We saw this specifically on an asset that made a major investment in HVAC equipment that resulted in significant operating savings. However, the amortizations were added to that year's base year, thereby materially raising the base year expenses and drastically reducing the recovery in subsequent years. When our team took over the management, we restated the base years and separated the calculation, which substantially increased the recovery from 20% to 88% of the annual amortization.

GlobeSt.com: What can commercial landlords do to make sure a property manager is protecting their bottom line?

Hazlewood: Industry standardization for the calculation of operating expenses is certainly the best way to maximize recoveries especially as it relates to gross ups, fixed and variable expenses, management fees, utility expenses and real estate taxes. Property managers are responsible for these calculations and yet, many have no formal training and have no in-house experts or mentors to help build their proficiency. An important step a landlord can take to avoid problems is to have a dialog with the potential management company regarding the operating expense recovery skills sets and experience of the team handling the asset.

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The Costliest Mistake Commercial Landlords Make

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