Operating Expense Pass Throughs

9/ July 2012

operating expense pass throughsIn a fully serviced lease, office tenants pay a rental rate that is inclusive of the operating expenses in the building they occupy.  However, office tenants with a fully serviced lease can potentially incur charges for operating expense pass throughs.  Operating Expense pass throughs are an office tenant’s proportionate percentage of building operating expense increases above the base year.  The base year for operating expenses is generally the first calendar year of a lease. An office tenant with a fully serviced lease is charged a pass through if operating expenses in a given lease year are higher than the base year.

During the base year an office tenant with a fully serviced lease is not charged anything for operating expenses.  Office building operating expenses don’t always increase, but if/when they do they can be a significant addition to office lease costs especially in a long term lease.  Therefore, when properly analyzing the potential cost of an office lease, estimations for operating expense pass throughs should be incorporated.

Generally, operating expenses for a Class A – C office building are $12.00/sf – $7.00/sf annually.  Operating expenses include, among many small and negotiable items: utilities, amortized building capital improvements and real estate taxes.  Again, operating expenses in an office building don’t always increase, but for the purposes of a conservative financial analysis a 3% annual increase should be estimated.

The table below illustrates potential operating expense pass throughs for a 10,000sf office tenant in a 10 year lease with a base year building operating expense cost of $10.00/sf:

* base year

If you are really excited to calculate your own potential operating expense pass throughs, here is a hyperlink to the excel table above.  Simply ask your building for the OPEX costs for last year and change the highlighted cells for SF and OPEX and the formulas in the spreadsheet will do the rest for you.

Written by // Jade Rice