Expense Stops For Tenants And Landlords

If you’re a landlord and you’ve got your tenants under a NNN lease you’re probably not too worried about expense stops.

When done correctly a NNN lease allows for all of the expenses related to a property to be passed through to a tenant, so in effect there’s a 100% expense stop for the landlord and no expense stop for the tenant.

If you’re active in commercial leasing you know that no two NNN leases are the same, and no two expense stops are the same. In practice, each lease is different and designed to meet the objectives of the landlord and the tenant.

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Expense Stops Defined

Expense stops typically show up in gross or modified gross leases, though some times in NNN leases as well.

An expense stop clause means literally what it says: After a defined amount of expenses, no more expenses will be incurred by that party, be it landlord or tenant.

This might sound confusing but here’s how it works in real life: 

Landlord Expense Stops

Let’s say that you’re a tenant leasing space under a full service or gross lease. In theory this means that the rent you’re paying includes everything (though often times net of electric and telecomm).

But in your lease there might be an expense stop provision in favor of the landlord, aka a landlord expense stop, that says if the landlord’s operating expenses exceed $X per year, then that additional increase will be passed through pro-rata to the tenants.

For example, the landlord’s operating expenses may have increased by $25,000 this year compared to last year. If your lease has a landlord expense stop of $15,000 – in other words the landlord is only going to cover the first $15,000 per year of increased expenses – then that balance of that $10,000 is passed on to you, the tenant.

So even if your lease has a flat 3% annual increase, if there’s a landlord expense stop provision, as the tenant you could be on the hook for that extra $10,000 plus your 3% annual rent increase. 

Tenant Expense Stops

Expense stops work both ways.

If you’re a landlord who has a lease with a tenant expense stop in place you could end up eating any sudden increase in operating expenses instead of being able to pass them through to your tenants.

Let’s use our example above.

Instead of there being a landlord expense stop of $15,000 let’s say there’s a tenant expense stop of $5,000.

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As the landlord your operating expenses year-to-year still increased by $25,000, but with the tenant expense stop of $5,000 in place, as the landlord you’re going to end up having to ‘absorb’ $20,000 in expenses that you can’t pass through to your tenant. 

Collecting On Expense Stops And NNN Lease Charges

While having tenant expense stops, landlord expense stops, and NNN fees in NNN leases sounds good, the key question as a landlord is whether or not you can actually collect any increase in NNN charges or increased expenses from your tenants.

Jeffrey Roark
Basic Property Management Training