A lease that requires the tenant to pay a share of expenses above a base-year amount contains:
Correct Answer
D) An expense stop
The stipulated expense-stop clause caps the landlord’s covered expense responsibility at the stated base and allocates the defined excess share to the tenant. Actual costs, exclusions and reimbursement timing follow the contract. This is a different feature from sales-based percentage rent or a purchase refusal right.
Why This Is the Correct Answer
Option D is correct because an expense stop caps the landlord's covered expense responsibility at the stated base and passes the defined share of increases above that base to the tenant. The actual costs covered, exclusions and timing of reimbursement follow the lease contract.
Why the Other Options Are Wrong
Option A: A right of first refusal
Option A, a right of first refusal, is wrong because that clause gives a party the chance to match an offer to buy or lease, not a duty to pay expenses above a base year.
Option B: A percentage rent clause
Option B, a percentage rent clause, is wrong because percentage rent ties additional rent to the tenant's sales, not to increases in operating expenses above a base amount.
Option C: A ground lease provision
Option C, a ground lease provision, is wrong because a ground lease concerns leasing land, often for long terms, and does not by itself describe a tenant paying expenses above a base-year amount.
The Landlord's Costs Stop
At the expense stop, the landlord's share of expenses stops growing and the tenant picks up the increases above the base.
How to use: Use this image to tell an expense stop apart from percentage rent and purchase rights.
Exam Tip
Link base year and excess expenses to expense stop, tenant sales to percentage rent, and matching an offer to right of first refusal.
Common Mistakes to Avoid
- -Confusing an expense stop with percentage rent
- -Assuming an expense stop makes the tenant pay all expenses
- -Ignoring expense reimbursements when projecting landlord income
Concept Deep Dive
Analysis
This question tests recognition of lease clauses that allocate operating expenses. A clause that has the tenant pay its share of expenses above a base-year amount limits the landlord's expense responsibility to that base. That feature is called an expense stop.
Background Knowledge
Leases allocate operating expenses in different ways, from gross leases where the landlord pays most costs to net leases where the tenant pays them. An expense stop sits between these, with the landlord paying expenses up to a base amount and the tenant paying the defined excess. Appraisers read these clauses to estimate expense reimbursements and the landlord's net income.
Real-World Application
An appraiser reviewing office leases finds that tenants pay their pro rata share of operating expenses above the base-year amount. The appraiser projects expense reimbursements from those clauses when estimating the landlord's effective gross income.
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Annual NOI is known, and operating expenses are 35% of EGI, with no other deductions. Which expression recovers EGI from NOI?
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