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Lease Strategies

Product Overview

This LARG contains the following items:

A Tenant Eyes Base Years, Base Amounts, and Expense Stops, The Tenant's First Year—Is the Expense Stop All It Should Be?, Are Soft Markets the Death of Expense Stops?, and the Lease Clause Critique: A Tenant Mulls Alternatives to an Exclusionary Approach to Operating and CAM Costs.

Number of Single Spaced Pages: 12





This LARG focuses upon operating expenses and CAM costs. The first section looks a base years, base amounts, and expense stops from a tenant's perspective. The next two parts look at expense stops with regard to first year contributions and the effect of high vacancy rates on the prevalence of expense stops. Finally, the Lease Clause Critique examines three alternatives to the normally heavy negotiations and drafting that attend operating cost inclusions and exclusions--a most favored nation treatment for operating costs, fixed contributions by the tenant, and operating cost histories and projections.

A Tenant Eyes Base Years, Base Amounts and Expense Stops

It has become common for commercial tenants to pay the operating or CAM (common area maintenance) costs of the buildings or complexes which they occupy. After such costs are determined, they are generally divided among tenants using their respective pro-rata shares based upon square footage. Commercial tenants know this—they also know how much operating and CAM expenses cost in the 1990's. Such costs can range between $3 and $17 per square foot per year, and are increasing as a percentage of the overall rent bill for the tenant.

The amount of operating and CAM costs paid every year by tenants gives them some incentive to review the mechanics of how pass throughs work. For example, while there are several methods the office or retail landlord can use to calculate total operating or CAM costs for the tenant under the lease, the particular method used can have a dramatic financial impact on the amount of operating or CAM costs paid by the tenant. These methods include:

  • The base year approach;
  • The base amount or stipulated base amount approach; and
  • The expense stop approach.

The Base Year Method

Landlords have made widespread use of the base year method. This approach makes the tenant responsible for its pro-rata share of operating costs which exceed those expended or incurred by the landlord during a "base year." A number of issues affect the actual amount of operating or CAM costs that will be passed through to the tenant when the landlord uses a base year method. For example:

  • Which particular year will be the base year used for the tenant?
  • If the building is new, is the base year proposed by the landlord a representative one which includes costs that are typical for the building or complex?
  • Has the building or complex been fully assessed by taxing authorities so that taxes will not be "understated" during the base year due to the reassessment delay which frequently happens with new construction?
  • If the tenant is taking space in an existing complex (i.e., not a new one), is the base year the year immediately prior to the year in which the tenant takes possession of the premises? This will ensure that the base for operating costs will be current for the tenant.
  • What if operating costs for one or more subsequent years, for some reason, do not exceed those for the base year? Is the tenant to be given a credit for its pro-rata share of the shortfall?
  • Is the base year to be a "fiscal" base year or a "calendar" base year?
  • Will the type of base year (i.e., calendar or fiscal) have any effect upon the arithmetic for operating costs (e.g., are taxes and other expenses paid in lump sums by the landlord prorated so that they are allocated to their proper base year or subsequent lease year)?
  • How are the costs for partial lease years handled? If the lease provides that the tenant is to be put on the same accounting year as all other tenants, and that the partial year following the commencement of the term will be treated separately, is the proposed treatment fair to the tenant from an economic standpoint?
  • Is there to be any adjustment of the base year during the term of the lease, especially for renewal options? Often office tenants with lengthy terms request that the base year be made current when renewal options are exercised. Of course, such concessions depend upon the overall business deal, and in particular, upon the manner of fixing renewal rentals (e.g., scheduled rentals, fair market rentals, CPI adjustments, etc.).


End of Excerpt