Before You Move Into an Empty Building, Know This

Office buildings with vacancies often have distorted expense pass-throughs.  This brief case study outlines why and how this can become an issue for tenants.

In 2009, ABC Company moves into a building that is only half occupied.  ABC signs a 10-year base year lease, where it agrees to pay for increases in building expenses over time, with 2009 serving as its base year.  The lease states that as building expenses rise from year to year, the landlord is to compare them to the expenses from 2009, and send ABC a bill for its share of the difference.

Over the next two years, the building starts to fill up as the landlord periodically leases out the remainder of the vacant space.  By 2011, the building is 100% full.  Everyone is happy, and everything feels right for each tenant, on every floor.

But something is wrong. For some reason in 2011, ABC receives a bill that is 10 times greater than expected! 

How Did This Happen?

Measurement of Square Footage

The size of the premises is one of the most important factors in the tenant’s leasing decision. It is imperative that this factor receives the proper attention during the lease negotiations and the drafting of the lease documents. This article discusses critical issues such as rentable and usable space, the different measurement standards applied, the linkage between size and rent, and how best to protect a tenant’s interest during the lease negotiation process.

Capital Expenditures – Includable or Not?

As a general rule, capital expenditures should not be included in tenant pass-throughs. This article explores the reasons why and how tenants must strive to keep capital expenditures out of the operating expense clauses in their leases. This article reveals how leases may be structured to include or exclude the various (and sometimes hidden) forms of capital expenditures, and how to properly account for such expenditures.

Cost-Reducing Capital Expenditures

In a previous LeaseTip, we wrote about how Capital Expenditures should be excluded from tenants’ operating expense pass-throughs because they constitute ownership’s costs to either 1) improve the property or 2) replace property components as they wear out, and both improvement costs and replacement cost are already captured by the base rent. However, many clients have asked us whether it is appropriate to allow capital expenditures that reduce operating expenses. This article explores the various situations and conditions in which it may be appropriate for a landlord to include cost-saving capital expenditures in a tenant’s operating expense pass-throughs.