Expense Stop
A mechanism in a Full Service Gross Lease, the Expense Stop is a fixed amount of operating expense above which the tenant is responsible to pay. Thus, the landlord is responsible to pay for all operating expenses below the Expense Stop, while the tenant is responsible for any amount above the Expense Stop.
So for example, if the Expense Stop is $10 per square foot and operating expenses in a given year equal $11 per square foot, the tenant would be responsible to reimburse the landlord $1 per square foot ($11 – $10).
Expense Stops can take the form of an agreed upon amount, typically expressed in an amount per square foot or per square meter or a base year stop. A base year stop sets the expense stop equal to the actual operating expenses in the first year of the lease. So for instance, if the actual operating expenses in the first year amounted to $9.50 per square foot, the Expense Stop would be set at $9.50 per square foot and the tenant would be responsible to reimburse the landlord for any expenses above $9.50 per square foot in any subsequent year.
Putting ‘Expense Stop’ in Context
Scenario:
National Mall REIT owns Meadowland Mall, a 500,000-square-foot regional shopping center located in suburban Minneapolis. One of their tenants, Abercrombie & Fitch, occupies a 7,500-square-foot space within the mall under a Full Service Gross Lease. As part of their lease, Abercrombie has an expense stop clause set at $9.50 per square foot, which was established based on the operating expenses in the first year of the lease (a base year stop).
Understanding the Expense Stop
In this scenario, National Mall REIT, as the landlord, is responsible for covering all operating expenses up to $9.50 per square foot, which was the operating cost in the base year. However, Abercrombie is responsible for any amount that exceeds the $9.50 per square foot expense stop. This ensures the tenant contributes to any increases in operating expenses over time, while National Mall REIT retains responsibility for the base-level costs.
Applying the Expense Stop
Let’s assume that in the current year, the mall’s operating expenses increase to $10.25 per square foot. The difference between the current expenses and the expense stop is:
Reimbursement per square foot = Current expenses – Expense stop = 10.25 – 9.50 = 0.75
Abercrombie would be responsible for reimbursing National Mall REIT $0.75 per square foot. Given their leased space is 7,500 square feet, the total annual reimbursement amount is calculated as:
Total reimbursement = 7,500 SF × 0.75 per SF = 5,625
Tenant and Landlord Responsibilities
- Landlord’s Responsibility: National Mall REIT will continue to cover all operating expenses up to $9.50 per square foot.
- Tenant’s Responsibility: Abercrombie will reimburse the landlord for any operating expenses exceeding $9.50 per square foot, which in this case totals $5,625 for the year.
Conclusion
The expense stop mechanism in Abercrombie’s lease at Meadowland Mall helps protect National Mall REIT from the burden of rising operational costs while giving Abercrombie predictable cost exposure for their share of those increases. This arrangement also aligns the tenant’s and landlord’s interests by ensuring that operating efficiency remains a priority for both parties.
Frequently Asked Questions about Expense Stops
What is an Expense Stop in commercial leasing?
An Expense Stop is a fixed amount of operating expenses that a landlord agrees to cover under a Full Service Gross Lease. The tenant reimburses the landlord for any expenses exceeding that amount.
How is an Expense Stop typically calculated?
Expense Stops can be set as a specific dollar amount per square foot or based on a “base year stop,” where the stop equals actual expenses incurred in the first lease year. For example, if operating expenses were $9.50/SF in the first year, that becomes the expense stop.
What happens if operating expenses exceed the Expense Stop?
The tenant must reimburse the landlord for the excess. For instance, if expenses rise to $10.25/SF and the expense stop is $9.50/SF, the tenant pays the $0.75/SF difference.
How does an Expense Stop impact landlord and tenant responsibilities?
The landlord covers costs up to the stop amount, and the tenant pays the overage. This structure limits the landlord’s exposure to rising costs and incentivizes tenants to monitor operating efficiency.
Can tenants negotiate the terms of an Expense Stop?
Yes, tenants may negotiate for a higher or fixed expense stop or request caps on annual increases to manage cost exposure over time.
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