Lease Clauses that affect Cash Flows 
Many commercial leases contain alternative treatments of operating expenses. These alternatives may require owners to pay operating expenses up to a given amount (Expense stops), allow owners to pass some of the cost of operating the property through top the tenant (expense pass through), or allow the owner to charge the tenant(s) for some of the increase in the cost of operating the property.
Expense Stops
With some commercial leases, the owner may add and expense stop clause. In this situation, the owner pays operating expenses up to a specified amount, usually states as an amount per square foot (psf) of rentable space in the building. Psf expenses in excess of the expense stop are passed through to tenants based on their pro rata share of the building’s rentable space.
Expense stops benefit owners by limiting their exposure to the risk of operating expenses being greater then expected. These stops also allow owners to forecast costs based on predictable expenses. Owners give tenants something of value in exchange for the expense stop clause.
Expense Pass-Through
Operating expenses frequently are paid by the owner and then passed-through to the tenants. This is especially true in the multi-tenant office building and shopping centers. In retail properties, a tenant’s share of these expenses pass-through is based on the gross leasable area (GLA) of the tenant’s store as a proportion of the GLA of the entire shopping center.
As with expense stops, owners give tenants something of value in exchange for the expense pass-through.
Common Area Maintenance
Common area maintenance (CAM) charges area a common expense pass-through in shopping center leases and other multi-tenant situations.
These are the costs associated with maintaining the common area of a property, such as hallways, lobbies, grounds and parking lots. These costs usually are calculated on the percentage of rentable space that the tenant is occupying. CAM clauses benefit owners in that when maintenance costs increase, the increase is passed on to the tenants.
Tenant Improvements
Owners often incur re-tenanting expenses when leases expire and vacant office and retail space must be made ready for occupancy.
In fact, many office and retail leases provide a tenant with an improvement allowance. This lease provision obligates the owner to incur a prespecified dollar amount of expenditures to improve the space to the new tenant’s specifications.
Tenant Improvements and Tax Benefits
Responsibility for payment of tenant improvements can provide tax benefits. Generally speaking, if the owner pays for the improvements, these costs may be expensed over 39 years.
If the tenant pays for the improvements, and the changes simply maintain the value of the property, the tenant may write off the costs in the year the improvements are done. If the improvements increase the value of the property, the tenant may write off the cost over 39 years or when the tenant vacates the property.
Always check with a qualified tax professional before taking deductions on your taxex!
I hope you enjoyed this series on commercial leases.
In the next installment I'll be posting a glossary specific to commercial real estate and leases.
The full article series, which was previously published in Invest Magazine and can be read in its entirety here: http://www.panamacityrealtygroup.com/leasespart1.php
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