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

Structuring Pass-Throughs, Exclusions, Gross-Up, Expense Cap, and Other Provisions in Net Leases and Structuring Gross Leases

CPE credit is not offered on this program.

Recording of a 90-minute premium CLE video webinar with Q&A

Conducted on Thursday, June 10, 2021

Recorded event now available

or call 1-800-926-7926
Course Materials

This CLE course will discuss net and gross real estate lease structures (and those in between) and the allocation of operating expenses for different types of lease agreements. The program will cover negotiation from landlords' and tenants' perspectives on defining operating expenses, pass-throughs and exclusions, and other lease provisions impacting costs such as gross-up and expense cap provisions.

Description

The allocation of operating expenses in a commercial real estate lease is based on the lease structure, whether a net lease, triple net lease, gross, or modified gross lease. Operating costs broadly include utilities, taxes, insurance, lease 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 contract, 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.

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Outline

  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

Benefits

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

Faculty

McPhelin, Hannah
Hannah Dowd McPhelin
Partner
Troutman Pepper

Ms. McPhelin concentrates her practice in real estate matters and other business transactions, including the...  |  Read More

Tomec, Julia
Julia E. Tomec
Partner
Troutman Pepper

Ms. Tomec concentrates her practice in commercial real estate matters and other corporate business transactions,...  |  Read More

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