Operating Expenses Pass Through – What extra costs am I responsible for?

Office buildings traditionally use a lease type called a Full Service Gross (FSG) lease.  This lease means your rent already includes taxes, insurance, utilities, repairs and maintenance, etc. except for your phone and internet.  It might seem that other than your fixed annual increase, this is the extent to your rent costs. However that is not always the case.  Pass through costs represent the share of a buildings operating expenses (Taxes, Insurance, utilities, repairs and maintenance, etc.) that the landlord passes on to the tenant each year.  A tenant will have the responsibility to pay their share of any increases in Operational Costs over their “base year”.  The Base Year is referred as the buildings Operating Costs of the 1^st year of the lease and is typically calculated to a “gross up” 95% occupancy level.  The ability to pass through Operating Expenses enables the Landlord to protect themselves against increases in cost due to inflation and other similar forces.  Most common leases favor the landlord and provides them with the ability to pass through these increases.

The landlord typically provides the tenant with their estimated share of Operating Expenses for the projected year based upon previous yearly Operating Expenses.  The tenant will pay 1/12 of their estimated Operating Expenses each month. At the end of each year, the landlord may provide to the tenant a final statement of the actual expenses for the prior year and either the landlord to refund the overpayment or tenant to pay the outstanding difference in balance.  

Putting a cap on annual “controllable expenses” (Building Service Contracts, Personal Salaries, Management Expenses, Capital Expenditures) is a way tenants can protect themselves from excessive pass through costs.   Also requiring the landlord to deliver to a tenant at the end of each year a detailed statement of the actual operating expenses for the prior year will affirm the pass though amount is correct.  On your lease be sure that the specific calculation to your percentage of space is stated and be aware of specific lease language on operating expenses that allows for additional expenses to be backed in.    

Leasing Space? What you need to know! BOMA, Rentable vs. Usable

Buildings are typically measured using a standing method called “building owners and managers association” or BOMA measurement standards. 1915 BOMA first published an accepted and approved methodology of floor measurement for office buildings by the American National Standards institute.  As design standards have changed throughout the years, so has the way BOMA measurement standards are used.

Area calculations from field measurements will most likely never be exactly the same, but considered accurate when results are within 2% or less.

Building measurements are given in terms of Rentable Square Foot (RSF) and Useable Square Foot (USF).  The RSF is the USF plus the Common Areas.  Common areas are considered to be restrooms, elevator lobby, hallways, stairwells, mechanical rooms, etc. These areas are not exclusive to any one tenant, but are shared by all tenants.  Let’s say for example the total RSF of an office building is 10,000 sq. ft. and the Common Area is 1,500 sq. ft .  10,000 sq. ft. - 1,500 sq. ft. = 8,500 sq. ft. of USF.

 A Load Factor is a multiplier to a tenant's USF that accounts for the tenant's proportionate share of the common area.  A load factor can typically range from 15% to as high as 30% for a multi-tenant floor.  In the above example the load factor is 1,500/10,000=15%

For example, leasing a 2,000 sq. ft. office space with a Load Factor of 15% would give you (2,000 sq. ft. – 15% = 1,700 sq. ft.) of Useable space.

Higher load factors may not always mean less, as often times other amenities such as atriums and spacious lobbies are appealing to clients and guests.  Also to note, Tenants occupying an entire floor will not have shared hallways or shared bathrooms and can be charged a lower load factor than a tenant on a multi-tenant floor as their common area will be less.  Knowing your load factor can really save you a lot of money.

San Fernando Valley 3rd Quarter Office and Industrial Market Report

All-around improvements show stability, but growht still elusive

Office - Full Report

Market sees little change as leasing remains constant

Industrial - Full Report

Los Angeles Class A Office Vacancy Recovery! Are We There Yet?

Optimism is echoed as compared to the previous quarters by many office investors and business owners. A recent leasing survey by local real estate professionals show lease transactions consummating but at a steady and slow pace. Renewals by Tenants are keeping the vacancy factor constant as long as Tenants are not leaving. We are not seeing many new businesses located in the local area making sideways moves. Many Landlord Leasing Representatives are targeting quality tenants located just outside the local market in hope of brining them in. Businesses that have weathered the storm by now, are able to take a slight breath as the overall sluggish economic moves in a positive direction but at snails pace.  Construction has yet to be seen, however there is buzz out there that projects are going to begin. 

Los Angeles Business Journal Article

Klorman Business Center Office for Lease 23047 Ventura Blvd, Woodland Hills

The Klorman Business Center located within the west San Fernando Valley in the city of Woodland Hills on Ventura Boulevard. This newly remodeled office building was built with quality construction and beautifully upgraded common areas. The move-in ready new office suites have abundant window line and high end office amminities. Tenants have 24/7 access to the property and state of the art security systems.