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Expense Escalations - Who Pays When Operating Expenses Increase? Free Information On Expense Escalations - Who Pays When Operating Expenses Increase? Expense escalations are relevant when the landlord is paying a base level of expenses and when the tenant is paying expenses in excess of the base. With a typical gross lease, the landlord pays all expenses and the tenant pays expenses in excess of a base level. (Gross leases are typical for office.) The base level is typically the operating expenses for the year the lease is signed. The "expense escalations" would be expenses in excess of this base level. The tenant pays these expenses, for their pro rata portion of the building. Caps on Increases? Some leases also provide a cap on increases in expenses. Expanse caps often address the total expenses. Some expense caps are more detailed and include limits on individual line item expenses. To provide more certainty for the tenants cost of occupancy, the tenant may request that property tax increases do not exceed 5% in any year. Property tax increases can be enormous in some states. For example, initial property tax assessments in Texas for office buildings have increased by 20% to 100% for many office building owners. In many cases, these large initial assessments have been successfully reduced to a level much closer to the prior year's value. Cap Example However, the property tax assessment process can be arbitrary at times. If the property taxes did increase by 20% or 100%, the landlord would be responsible for the increase in excess of 5% for the example given. There are also sometimes expense escalation caps for utilities, insurance, total expenses and other items. Eminent Domain Eminent domain is the right of government to take private property. Historically, eminent domain was limited to taking private property for public purposes. However, the US Supreme Court expanded eminent domain to include taking private property for private uses. In most cases, property owners are compensated for "takings" through eminent domain. Eminent Domain Issues Issues related to leasing office space include who retains compensation for a leasehold estate, what happens if eminent domain takes an amount of parking which makes operation of the office building impractical and if there any rental abatements during construction related to a partial taking of the office building. Next Chapter Leasing Office Space - Leasehold Estate
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