1. Operating Expenses Explained
Dottie Surdi
Operating expenses are the costs of running the building or shopping center in which your rental space is
located. This includes items such as insurance, property taxes maintenance & utilities of common areas.
This is a list of the typical expenses generally included:
Administrative Expense Lights, General Maint.
Alarm Services Management Fees
Carpet Cleaning Pest Control
Elevator Maintenance Plumbing Repairs
Gas & Electric Roofing Repairs
General Building Repairs Sewer & Water
General Insurance Taxes- Real Estate
HVAC Repair & Maintenance Telephone
Janitorial Expense Trash Removal
Landscape Repairs & Maintenance
In most modified gross leases, the tenants only pay increases in operating expenses over the operating
expenses paid in a given year, the base year. In other words, a typical lease is structured such that during the
first year of the lease term, the base year, the tenants only pay a base rental rate and thereafter the tenants pay
the base rental rate AND increases in operating expenses over the operating expenses paid during the base
year.
In a multi-tenanted building or shopping center, these increases in the cost of operating expenses are typically
apportioned among tenants based on the size of the space they occupy. Hence, if the office building is 100,000
square feet and a tenant’s space is 5,000 square feet, that tenant occupies 5% of the building and would pay
5% of the increase in operating expenses for the building over the base year. This is typically called the tenant’s
prorata share or “Tenant’s Share” of the operating expense increases in a modified gross lease.
Here is an example of how this would work for this tenant with a 5% share using these hypothetical Operating
Expenses:
Year Total Annual Operating Increase in Op Expense Tenants Annual Tenants Monthly
Expense for Building over Base Yr Share Share
1 (Base year) $155,000 NA NA NA
2 $154,000 $0 $0 $0
3 $156,000 $1000 $50.00 $4.16
4 $155,000 $0 $0 $0
5 $156,500 $1500 $75.00 $6.25
For free advice, a no-obligation consultation or lease audit
to determine the cost-savings and real estate strategies
available to you, call:
Dottie Surdi direct: (858) 349-2007
dottie.surdi@svn.com
SVN Management, Inc. dba Sperry Van Ness
Serving All Your Commercial Real Estate Needs
San Diego, Los Angeles, Orange County, Riverside
& the Inland Empire
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