What Are Operating Expenses in an Office Lease?
Operating expenses are costs associated with maintaining and running a building. These can include common area maintenance, janitorial services, taxes, insurance, and utilities. In most office leases, these expenses are passed on to the tenant and are commonly referred to as “additional rent.”
Types of Additional Rent Provisions
Landlords use various methods to recoup operating expenses from tenants. Here are the three most common types:
1. Expense Stop
In an “Expense Stop” lease, a specific amount per square foot is designated as the operating expense component within the rent. Tenants are required to pay their pro-rata share of any operating expenses exceeding this amount.
2. Base Year
In a “Base Year” lease, a calendar year is set as the benchmark for operating expenses. Tenants will pay their pro-rata share of any expenses that exceed the costs incurred during this base year.
3. Net Lease
A Net Lease is a commercial lease agreement where the tenant pays the base rent plus one or more additional expenses related to the property. These additional expenses can include property taxes, insurance, or maintenance costs, but not necessarily all three. The specific expenses the tenant is responsible for will be outlined in the lease agreement.
Types of Net Leases
- Single Net Lease (N Lease): Tenant pays base rent and property taxes.
- Double Net Lease (NN Lease): Tenant pays base rent, property taxes, and building insurance.
- Triple Net Lease (NNN Lease): Tenant pays base rent, property taxes, building insurance, and maintenance costs.
Paying Operating Expenses: What to Expect
Landlords usually estimate operating expenses in advance. Tenants are expected to pay these costs monthly, along with their base rent. An annual reconciliation typically occurs within 90 to 120 days after the year-end.
Negotiating Your Lease: What to Watch For
Exclusions and Caps
Tenants should negotiate to exclude certain items from the operating expense calculations. Some landlords may also agree to cap “controllable” operating expenses, such as maintenance costs.
The Gross-Up Clause
Many leases include a “gross-up” clause, allowing landlords to calculate operating expenses as if the building were fully occupied. This ensures that variable costs are fairly allocated among tenants, but it’s crucial to ensure that non-variable costs like taxes and insurance are not included in this calculation.
Why You Need Professional Help
Navigating the intricacies of an office lease can be challenging. A poorly negotiated lease can cost you significantly over its term. Therefore, it’s advisable to engage both a tenant-focused broker and a real estate attorney to assist in negotiating your lease agreement. These professionals can help mitigate your financial risks and ensure that you’re getting the best deal possible.
Conclusion
Rent is more than just a monthly payment; it’s a complex structure that includes various operating expenses. Understanding these costs and how they are calculated can save you money and prevent unpleasant surprises down the line. Always consult professionals when entering into a commercial lease to ensure you’re fully aware of all potential costs.
By understanding the nuances of your office lease, you can make more informed decisions and negotiate better terms, ensuring that your business thrives in its new space.