CRE glossary
Expense stop
An expense stop is the operating-expense level set in the base year of a modified gross lease. The landlord pays operating expenses up to the stop; the tenant pays their pro-rata share of any increases over the stop. Expense stops protect tenants from runaway operating costs in early years while letting landlords pass through inflation over time.
The base year is typically year 1 of the lease, and the actual operating expenses for that year become the stop. In year 2, if expenses rise, the tenant pays the pro-rata share of the increase only, not the full operating cost. By year 7 of a 10-year lease, the tenant might pay 4–5% of the expense increase, but the landlord still owns the original stop level.
The 'gross-up' clause is critical. If the building is under-occupied during the base year (vacancy = lower janitorial, utilities, etc.), the stop comes in artificially low. When occupancy normalizes, costs rise, and the tenant pays the difference. Always negotiate a 95% gross-up clause that normalizes the base year as if the building were 95% occupied, regardless of actual occupancy.
Expense stops reset on lease renewal, often to the renewal year's actuals. Some leases auto-reset every 5 years even within the original term; this is much worse for the tenant because each reset eats the protection. Negotiate hard against mid-term resets.
Example
- Year 1 actual OpEx
- $11.50/SF (the stop)
- Year 2 OpEx (after grossup)
- $12.00/SF
- Tenant adds in year 2
- $0.50/SF
- Year 5 OpEx
- $13.20/SF
- Tenant adds in year 5
- $1.70/SF
Broker perspective
Expense stops are the most overlooked tenant-protection mechanism in modified gross leases. A bad base year, under-occupied building, missed grossup clause, capital expense that compressed normal OpEx, can lock the tenant into 5+ years of overpayment. Spend the negotiation hours on grossup language; it pays back ten times over the term.
Frequently asked
People also ask
Expense stop vs base year, same thing?
Effectively yes. The base year is the year; the expense stop is the dollar amount that comes from it. Used interchangeably.
What's a gross-up clause?
Adjusts the base year as if the building were 95% (or sometimes 100%) occupied, normalizing vacancy distortions. Critical for tenants in newer / lease-up buildings.
Can the stop be set in advance?
Yes, some leases use 'projected' base years rather than actuals. Less common; often disadvantageous to tenants.
Does the stop apply to taxes?
Usually yes. All operating expenses including taxes are subject to the stop. Some leases carve taxes out, confirm in the LOI.
Related terms
Modified gross lease
A hybrid where the landlord covers some operating expenses in base rent and passes through others, middle ground between full-service and NNN.
Operating expenses (OpEx)
All costs to run the building, taxes, insurance, utilities, janitorial, management, that get passed through to tenants in NNN and modified gross structures.
Common area maintenance (CAM)
Tenant's share of the cost to operate and maintain shared building areas, lobbies, parking, landscaping, HVAC, security.
Base rent
The headline rent before pass-through expenses, usually quoted in $/SF/year and the starting point for every comp.
See expense stop extracted from a real lease.
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