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On the quiz for the Office Course, Question 7 and answer 2 had a typo in it. Just a grammatical mistake.
My question was I was double checking my quiz questions, and one of the answers I didn’t understand. The question was “Operating expenses above the Expense Stop are the landlord’s responsibility.” I didn’t remember this being addressed in the course, but I assumed that an Expense Stop was a concept in the lease of an office that kept the expense reimbursements from going on forever.
Hey Peter – thanks for the heads up on the typo. I’ve corrected Q7, answer 2. It should now read: “Building amenities always lose money, but are necessary to keep tenants happy.” That’s NOT the correct answer, by the way! Some amenities do turn a profit.
To your question about the Expense Stop. You can find a discussion on the concept in lecture 1.4 of this course.
But think of the Expense Stop as a way for the landlord to limit its risk to cost inflation. The landlord commits to paying for expenses up to a certain point (i.e. the Expense Stop), and above that point the tenant is responsible.
So for example, imagine a scenario where the landlord signs a gross lease at $24/SF with an expense stop of $8/SF. In this scenario, the landlord would expect to take in $24/SF in rent and spend up to $8/SF in operating expenses – or net $16/SF. If operating expenses at the property exceed $8/SF in any year, the tenant would be responsible to pay (or reimburse the landlord) for those expenses above $8/SF (i.e the Expense Stop).
Hope that helps!
Spencer
I figured out where I missed the Expense Stop. I got the logic moved around. It seems a concept where a landlord accepts paying expenses as long as they don’t except a certain amount.
I appreciate the practical example. That really helps as well. Sounds like something unique to Office. I would guess easier to do in single tenant spaces, or at least in situations where things are metered, so you can attribute usage.
Yes, this type of lease provision is most common in office and retail leases, although it can be seen in any long-term (i.e. greater than one year) lease. And it’s actually quite common in multi-tenant buildings.
Generally speaking, how it works in a multi-tenant building is that each tenant agrees to reimburse its pro rata share (based on occupied area) above its Expense Stop. So if a tenant occupies 10,000 SF or 10% of a building and if the building had $1,000,000 of total reimbursable operating expenses in the year, $100,000 ($10/SF) would correspond to that tenant. Further imagine the tenant had an $8/SF ($80,000) Expense Stop. The tenant would be responsible to reimburse the landlord for $10-8/SF = $2/SF x 10,000 SF or $20,000 of the tenant’s pro rata share of operating expenses.
The existence of these types of leases is one of the main reasons ARGUS has become so popular. Since each tenant generally starts its lease in a different year, and since the Expense Stop is often equal to the operating expenses in that initial year (Base Year), many tenants will have a different Expense Stop. This makes modeling reimbursements quite complex, and thus necessitates non-Excel solutions such as ARGUS.
We cover this concept in more detail in course 5. Introduction to Modeling Leases.
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