Well, if your like many tenants these days you may want to bring your bathing suit to the next lease negotiation meeting…
Most Full Service Gross, or “Base Year” leases used to combine all of the operating
expenses (including taxes, insurance and utilities) into one expense “pool” and the tenant would be responsible for any “increase” over the Base Year expenses. But over the years, landlords (with just a little help from their attorneys) have gotten a little sneakier with the Base Year concept. Many leases now separate different expense categories into “Pools.” Basically this allows expenses to go down in one category with no offset to increasing expenses in other categories. The result can create a new profit center for landlords.
The first “Expense Pool” I experienced was a lease that separated real estate taxes from operating expenses. This didn’t bother me to much at first due to the increasing nature of California taxes, until buildings were sold in a downturn and the “Tax Pool” reduced significantly – without offsetting the buildings steadily rising operating costs.
As time has passed, more “Pools” have been added to leases. I regularly see separate expense pools
for insurance, utilities, CAM charges and others with no end in sight. Since when was electricity not an operating cost? Heck, why not just assign each vender their own expense pool? Sorry for the sarcasm, but you would think some landlords were competing with the Grand Wailiea for the most pools on premises.
Strangely, I have not seen a huge amount of blowback on this by many tenants and their attorneys. This is partially due to the defense that many landlords use, “Well, we can’t calculate expenses differently for each tenant…” My answer is, “Well, sure you can. Jump on in, the water is warm.”
The funniest part of this is that the whole base year concept was created because tenants wanted to shift the risk of unknown initial expenses to the landlord. But with all the “pools” to swim in, tenants might just be better off in their birthday suit with a NNN lease. At least in that manner their costs will decrease when their buildings expenses go down. Regardless of how your lease turns out make sure you regularly review your pass through expenses.