If you are a tenant at a property with a single building, your share of operating expenses and property taxes is an easy concept to understand. But in most multi-tenant office buildings, leases are structured as “Full Service Gross” where the rent includes the tenant’s share of operating expenses for the first year, or “base year” of the lease; in subsequent years, the tenant is charged only for increases over those base year expenses. Are you confused already? It’s not unusual. All the more reason to have a knowledgeable advocate in your corner.
The calculation of these increases is where tenants can be cheated. For instance, what if you leased space in a building that was 50% occupied. Would the building’s electricity expenses be lower that year than in a future year when the building is 85% occupied? Absolutely yes. Let’s do a little quick math. If you occupied 5% of the building and the base year electricity cost was $25,000, 5% would be $1,250. In that future year with the occupancy up to 85%, the electricity cost is $42,500 and your share is $2,125. Therefore, your share of the increase over the base year is $875.
But wait. Look at a utility bill in each of the two years. The utility’s rate per kilowatt hour has not changed! If this doesn’t seem fair, you are right – you are being ripped off! A well written lease should state that occupancy-sensitive operating expenses (like utilities and janitorial services) for the base year and all future years must be adjusted to reflect an occupancy constant like 90% or 95%. If that rule is in the lease and properly adhered to, the increase of electricity costs over the base year charged to you in the scenario above would be zero.
A good real estate broker with some property management experience will have your back. Be sure you have one looking over your shoulder. It could save you an arm and a leg.