OPERATING EXPENSES AND AUDIT ISSUES PRESENTATION

1OPERATING EXPENSES AND AUDIT ISSUES I. BACKGROUND A. Why This Is Important. With limited exception, all building owners incur some expense in connection with the ownership and operation of a building in which it leases space to tenants. The landlord and tenant (also with limited exception) agree to share these expenses in some manner during the term of the tenant’s lease. The “types” of expenses associated with the ownership and operation of a building may be divided into many subcategories and along many different lines. For example: • ownership vs. operation • maintenance vs. repair vs. replacement • fixed vs. variable • capital vs. ordinary • mandatory vs. discretionary • controllable vs. uncontrollable The numerous ways in which one may categorize the specific expenses associated with the ownership and operation of a building influences and informs the negotiation of the particular cost sharing agreement between the landlord and tenant in any lease. Typically, the landlord and tenant negotiate a cost sharing agreement, whereby the total “rent” payable by the tenant under the lease is equal to the sum of two components: (i) an amount fixed at the beginning of the term (“base rent” or “fixed rent”), plus (ii) the tenant’s “share” of [increases in] a subset of landlord’s expenses associated with the ownership and operation of the building which, presumably, have not already been factored into the base rent amount (“rent ...