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.