Allocating Operating Expenses in Commercial Real Estate Leases: Negotiating Strategies for Landlords and Tenants

The allocation of operating expenses in a commercial real estate lease is based on the lease structure, whether it is a net lease, triple net lease, gross, or modified gross lease. Operating costs broadly include utilities, taxes, insurance, leased premises maintenance, common area maintenance, and management expenses, among other items.

One key issue in allocating operating expenses is defining what to include and, more importantly, exclude in various categories of operating expenses. The scope or definition of operating expenses is a matter of agreement, so counsel must scrutinize the lease language and exclusions when negotiating operating expenses.

Tenants often seek to negotiate a cap on operating expenses, and a critical distinction is whether that cap is cumulative or noncumulative. Another crucial provision governing operating expenses is the gross-up provision that causes certain operating expenses that vary with the building's occupancy to be artificially increased and should be carefully drafted.

Counsel must understand options when negotiating these provisions to shield clients from unexpected costs and charges due to unclear provisions regarding tenant reimbursement to the landlord.

Listen as our authoritative panel of real estate practitioners walks you through the different lease structures and the more common allocations of operating expenses within each structure. The panel will look at the negotiating perspectives of both landlords and tenants on defining operating expenses, pass-throughs, exclusions, gross-ups, expense caps, and other lease provisions impacting expenses.

1. A brief overview of different types of lease structures
2. Standard operating expense inclusions and exclusions
3. Gross-up provisions
4. Expense cap provisions
5. Tenant audit rights of landlord operating costs

The panel will review these and other key issues:

• Structuring gross-up provisions to protect both landlord and tenant
• Considerations for drafting a cap on operating costs
• Reasonable audit rights for operating expenses