Understanding Annual Operating Expense Reconciliation (OPEX) and Estimates

Tenants can expect their landlords’ annual Operating Expense Reconciliation (OPEX) and estimates to be forthcoming any moment. Operating Expenses are also referred to as Common Area Cost (CAM) in many leases.
One of the most critical items in these statements is ensuring that the accurate Base Year is stated correctly.
Base Year
The Base Year is the year the lease commences. Any increase in costs for operating the building is “passed-through” to tenants per the pro-rata share of space a tenant occupies.
Second Year of Full-Service Gross Lease
In the second year of a Full-Service Gross Lease, the landlord estimates what the increased operational cost over the first year of the lease will be (the Base Year), and tenants are billed in monthly installments.
Year-End Reconciliation
At the conclusion of the year, the landlord sets forth a “reconciliation” from the landlord’s estimates and the actual cost. A tenant’s statement will state the total amount in estimates a tenant paid against the actual cost. If the landlord forecasted accurately, the tenant would not owe any additional dollars. If a tenant overpaid, there will be credit, or if a tenant underpaid, an additional payment will be required.
Increasing Operational Costs
The cost of running a building has increased dramatically over the last number of years. Across the board, we have seen significant increases in operational costs, including:
- Insurance
- Janitorial services
- Security measures
- COVID-related precautions
- Landscaping and maintenance
- Employee costs
- Trash collection
- Accounting services
It is not unusual for a Base year to be misstated by a landlord, as all leases do not commence on January 1st of each year. The concept is that the first-year base rent is inclusive of the operating cost of a building, and that subsequent operational increases are “pass-through” to Tenants.
Understanding these elements is crucial for tenants to ensure they are being billed accurately and fairly for their share of the building’s operating expenses. A mistake in year one will compound each and every year of the lease, often resulting in significant overpayments by Tenants.
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