How to Reduce Operating Expenses In Your Lease

Operating expenses are the total costs that the Landlord pays to keep a commercial office building running.

They include utilities (electricity, water, sewage),janitorial, maintenance, supplies, security, administrative costs, building insurance, and property taxes.

The most common type of office lease is the gross lease, sometimes called a full service lease, in which all these operating costs are already in your rent.  However, these costs do not remain the same every year.  If they increase in the future, you will be responsible for paying your share.  In other words, the rental rate you pay in year one may not stay the same.  This arrangement is called operating expenses pass throughs, and it is a standard practice in office leasing.

Calculating operating expenses.  The first year of your lease is considered your base year. Your rent will not change during this time.  The Landlord uses it as the baseline for measuring your operating expenses going forward.  Starting at the end of year one, the Landlord reviews his expenses and estimates operating costs for the next year.  If he expects costs to increase, you will pay the increase in costs.

Example.  You leased 2,000 rentable square feet (RSF) in an office building and paid $18 per square foot in rent.  In year two, the building’s total operating expenses rose by $0.50 /RSF.  Your rent would now be $18.50 /RSF or an extra $1,000 per year (2000 RSF x $0.50).

Base Year. It is important to know how the base year is calculated before you sign a lease.  Some Landlords simply use the calendar year.  But what if you are moving in December?  Your base year would be almost over, and the rent could increase the following month.  A better way is to ignore the calendar year and calculate base year on a 12-month rolling basis, regardless of calendar year.  Ensure that the lease is calculated this way.  It is usually more favorable for the tenant.

A rise in operating costs is normal and is to be expected in the long term, but you should still do your homework.  Buildings with similar rents should have similar operating expenses. Once you have narrowed your search down to a couple of buildings, find out the previous 2-3 years’ expenses and the budgeted expenses for the coming year.  Similar buildings should show a similar trend in operating expenses.  If one is higher than the others, ask why.

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