Caps
There are two types of caps on controllable expenses
- Cumulative
- Non-cumulative
The cumulative cap usually compounds each year and builds upon itself from the inception of the lease.
The non-cumulative cap is simply based on the lesser of the prior year’s actual expenses or capped expenses.
A cumulative cap benefits the landlord.
A non-cumulative cap benefits the tenant..
How are controllable expenses usually defined in leases?
Controllable expenses are usually defined as all operating expenses that are not non-controllable.
What types of expenses are usually considered to be non-controllable?
- Real estate taxes
- Insurance
- Utilities
- Snow removal
This means that expenses, such as cleaning, R&M, security, landscaping, payroll and management fees will be categorized as controllable.
From a landlord’s perspective, the fewer categories considered to be controllable the better. Of course, tenants will have the opposite perspective.
Measurements of capped expenses usually begin in the year the lease commenced. However, leases that commence in the 4th quarter of the year may have the initial year of their cap set as the following year, if language in the lease allows it.
Setting the initial year for caps on leases in newly developed buildings or those prior to stabilization is crucial for the landlord in maximizing the recovery of expenses in the later years of tenant leases.