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Charles Feitel

What A Dental Real Estate Tenant Needs To Know About Rent Escalation Clauses (Part III)

What A Dental Real Estate Tenant Needs To Know About Rent Escalation Clauses (Part III)

6/22/2019 8:20:08 AM   |   Comments: 0   |   Views: 10

Expense Stops

If you have a full-service gross lease, you'll pay a base rental rate. The landlord has to pay for any additional costs. But sometimes, landlords put something called an expense stop in the lease. 

This means tenants pay for all operating costs above an agreed-upon amount. Landlords add expense stops so that tenants pay for operating costs that exceed what the landlord originally agreed to pay. 

If you have one in your lease, you'll have to pay for all operating costs above this amount. Your landlord pays for all fees at or below this limit. 

Expense stops help a landlord keep his operating costs at a manageable level. For example, let's say a 15,000 square foot building has two tenants in it. Each one occupies 7,500 square feet. Each tenant signs a lease for $20 per square foot. During lease negotiations, both parties agreed that the landlord would pay for all operating expenses up to $8 per square foot, which is $120,000 a year.

If operating costs for a given year happen to be $200,000, then the expense stop kicks in and the tenants will have to cough up $80,000 in additional cash. Each one will have to pay their pro-rated share, or $40,000 each.

Expense stops can be based on a certain amount of square footage. Or, they can be calculated off of what the base year operating expenses were.

If they're based on what the operating expenses were during the base year, this means the landlord covers all operating costs during that first year. In future years, the tenant has to pay all operating expenses above what they were in the base year. The portion of the costs that the tenant pays is known as "recaptured" expenses.

Negotiate for Audit Rights

 It's difficult for your landlord to allocate operating expenses fairly, especially in large buildings.

That's because there are literally thousands of expenses that have to be calculated to arrive at the final figure. This is everything from the costs of the cleaning crew who comes in at night to spiff things up, to the yearly maintenance of the building's boilers and furnaces.

Operating expense oversight is often given over to people who probably don't fact check the figures they're collecting against your actual lease. Unless you trust the landlord implicitly, there's no way of knowing whether his numbers are accurate unless you negotiated for the right to have a professional auditor look at your landlord's books.

The auditor will look at the numbers and make sure that everything is accurate with no mistakes. Having this right can save you so much money.

Your landlord might balk at including something like this in a lease. That's where your tenant rep comes in. A tenant rep has lots of experience in negotiating and will be your best bet to try to get audit rights inserted into your lease.

Don't just blindly assume your landlord will be fair and just because he might not be. And, this mistake could end up costing you a lot of hard-earned cash.

Be Proactive About Increases

You know your rent will go up eventually. That's why you need to set money aside for future hikes. Ask your landlord for the previous three years of records of rent paid by previous tenants.

Since rents go up on average of 3% each year, set aside at least this amount so you'll be ready for future increases.

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