Austin Office Expenses

Tenants will pay a portion of the additional costs (office expenses) a landlord incurs in operating the building they take occupancy in. How much of that increase is the responsibility of each specific tenant and how that additional office expense cost is calculated are two separate equations. First, let’s touch on the two generally accepted types of “Additional Rent” from expenses and how that works.

Base Year Expenses and Expense Stop

Are all additional rents calculating the same way? No, some landlords use a BASE YEAR EXPENSE method. Other landlords use an EXPENSE STOP. While both address the same expenses that the tenant is responsible for these methods differ.

Base Year

Part of your rent in year one, let’s say $18.00 PSF per year. This goes towards the landlord’s debt service and profit. The remainder goes towards operating the building. In a Base Year scenario, let’s say $10 goes towards debt service and profit and $8.00 towards NNN expenses. NNN expenses or are expenses to run and operate the property. If  a tenant’s lease calls for a base year, $8.00 is set as your foundation amount and your lease will state what calendar year is the base year expenses . Should the actual expenses increase in the second year to $8.12, you pay not only the contract rental increase, if any, but you also pay $.01 PSF (which is .12 cents /12 Months)  as “Additional Rent”.

“Additional NNN Expenses,” is what you would incur. If the expenses go down, the landlord should transfer the decrease to the tenant. Operating Expenses are budgeted and assessed to the tenant for the calendar year. They are then reconciled at year end. At reconciliation, the expenses may be less (actual vs budget) or higher which should be transferred over to the tenants leasing the property.

Office Expense Stops

An Expense Stop operates in much the same manner. Except, there always seems to be an Except! The landlord simply gives you a number, maybe $8 PSF, and tells you that $8.00 of your rent goes towards building operating expenses and anything above that you pay. Office Expenses will benefit landlords by limiting exposure to expenses being greater than expected during the course of a tenant’s  lease.

In other words, many landlords will incorporate some type of Expense Stop into Full Service leases. This is because it protects the owner’s operating income. For instance, when the property’s expenses increase over the life of a tenant’s lease term, the landlord is then able to bill the tenant for those increases, rather than absorb 100% of the expenses on their own.