Expense Caps - Commercial Lease Terminology - Part 1
In Commercial Real Estate Leases, an Expense Cap typically refers to expenses that are passed along from the landlord to the tenant for Common Area Maintenance of a building. The concept of an Expense Cap for a tenant is quite valuable, and often takes the form of a maximum allowed yearly expense increase from the initial baseline established in the lease for each expense item in question. Usually found in Gross leases, a cap on expenses is not a given, but is more often negotiated and usually only applies to expenses that are somewhat controllable by the Landlord - i.e. landscaping, common area cleaning, janitorial, and possibly management fees. Landlord generally do not cap expenses that are not controllably by the Landlord - i.e. Property Taxes and Property Insurance.
Leasing Overview Information
Our article - Types of Commercial Real Estate Leases - provides an overview of the major lease types used in Commercial Leasing.
Our article - Entering Into a Commercial Lease Agreement - A Guide From a Broker - provides a more comprehensive overview/guide to Commercial Leasing.
A commercial lease is, at least in general, a detailed specification of what property you will gain access to as a tenant, along with the responsibilities of tenant and landlord in terms of the elements of the property and the expenses involved. There are many different types of leases. Each should be analyzed carefully to see that they meet your expectations. Divvying up who will pay for what costs - now and throughout the life of the lease - is a major aspect of any lease. Some (many if not most, I hope) of these costs categories are summarized in the table below:
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A big part of a lease is outlining how these and other expenses are divided between landlord and tenant and how these expenses can vary over time for the tenant - which can, and probably should be limited by caps applied in the lease.
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