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Presenting a live 90-minute webinar with interactive Q&A
Allocating Operating Expenses in Commercial
Real Estate Leases: Negotiating Strategies
for Landlords and Tenants Structuring Pass-Throughs, Exclusions, Gross-Up, Expense Cap and
Other Operating Expense Provisions in Net and Gross Leases
Today’s faculty features:
1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific
TUESDAY, NOVEMBER 14, 2017
Scott D. Brooks, Partner, Cox Castle & Nicholson, San Francisco
Robert J. Sykes, Partner, Cox Castle & Nicholson, Irvine, Calif.
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FOR LIVE EVENT ONLY
ALLOCATING OPERATING EXPENSES IN COMMERCIAL REAL ESTATE LEASES: NEGOTIATING STRATEGIES FOR LANDLORDS AND TENANTS
STRAFFORD PUBLICATIONS
November 14, 2017
Scott D. Brooks, Esq.
Cox, Castle & Nicholson LLP 50 California Street, Suite 3200 San Francisco, California 94111
Phone: (415) 215-4962 Email: [email protected]
Robert J. Sykes, Esq.
Cox, Castle & Nicholson LLP 3121 Michelson Drive, Suite 200
Irvine, California 92612 Phone: (949) 260-4640
Email: [email protected]
OUTLINE OF PRESENTATION
I. Different Types of Lease Structures
A. Net Leases
1. Typical in retail and industrial; less common in office.
2. In single tenant context, may allocate responsibility for work to Tenant, at Tenant’s cost.
B. Base Year (or Full Service Gross) Leases
1. Typical in office leasing and sometimes in industrial.
2. Base Year is typically the first calendar year where there is 6 months after Commencement Date (so June 30 Commencement Date is typical cut off to move to next calendar year for Base Year).
3. Use of different categories to lessen impact of cost spikes in taxes, utilities or insurance costs.
4. Expense stop leases (using fixed amount as base rather than actual costs for a particular year).
C. Gross Leases
1. Mostly used in short term leases/licenses.
D. Hybrid (e.g., Net for Electricity or Janitorial)
1. Utility cost spikes have resulted in some landlords taking electrical costs out of Base Year.
E. Fixed Contributions
1. Increasingly common in regional malls and mixed use projects to simplify cost allocations/disputes.
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II. Standard Operating Expenses Inclusions and Exclusions
A. Included Items
1. General: costs of operation, management, ownership, maintenance and repair of the Project, as determined
by accepted principles of sound accounting practice.
2. Utility costs and costs of janitorial, security and other services.
3. Insurance costs and deductibles.
4. Project management, including management personnel costs, management office rental and management
fees.
5. Costs of repairs, maintenance and replacements, including costs of supplies, materials, equipment and tools
required therefor.
B. Excluded Items
1. Capital expenditures
a. Complete exclusion
b. Limited inclusion with amortization of costs.
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2. Ground lease rent and mortgage related costs.
3. Costs reimbursed by insurance, warranties or other third parties.
4. Costs of build out of tenant spaces and leasing costs, including marketing, attorneys’ fees and broker
commissions.
5. Depreciation or amortization (but see capital expenses).
6. Expenses in connection with services or amenities not available to Tenant or for which Tenant is separately
charged.
7. Amounts paid to Landlord affiliates in excess of market rate for goods or services.
8. Landlord’s overhead or administrative costs, such as personnel costs above the level of Building manager.
9. Costs relating to hazardous materials.
10. Costs of charitable or political contributions.
11. Costs of relating to artwork (other than ordinary maintenance).
12. Costs of correction of pre-existing non-compliance with applicable laws.
13. Costs of sale, refinancing of all or any part of the Project or any interest in Landlord.
14. Increases in tax expenses resulting from a change in ownership.
15. Taxes on rent or income of Landlord.
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16. Interest on late payment (other than interest on Tax Costs paid in the maximum number of permitted
installments with interest).
17. Parking facility costs or costs of any other commercial operation at the Project.
III. Gross-Up Provisions
A. Grossing up the components of Operating Expenses that vary based on occupancy
B. Grossing up the cost of items separately provided by one or more tenants in lieu of being provided by Landlord
C. Cost pooling
D. Treatment of new categories of expenses
IV. Expense Cap Provisions
V. Audit Rights
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SAMPLE NEGOTIATED OPERATING EXPENSE LEASE PROVISION
(“REDLINED” TO SHOW CHANGES FROM LANDLORD’S INITIAL DRAFT)
6. OPERATING AND TAX EXPENSES.
A. For the purposes of this Section 6, the following terms are defined as follows:
1. “Tenant’s Percentage” shall be that percentage set forth in Section 1(i), which percentage is the
quotient of the Rentable Area of the Premises divided by the Rentable Area of the Project, and which percentage shall be subject to
adjustment in the event of reduction or increase in the Rentable Area within the Premises and/or Project.
2. “Base Year Operating Expenses” shall mean the “Operating Expenses” (as hereinafter defined)
incurred in the Base Year.
3. “Base Year Tax Expenses” shall mean the “Tax Expenses” (as hereinafter defined) incurred in the
Base Year.
4. “Comparison Year” shall mean each calendar year during the Term from, including and after the
calendar year 2005.
5. “Operating Expenses” shall consist of all costs of operation, management, ownership, maintenance
and repair of the Project, as determined by accepted principles of sound accounting practice, including the following costs by way
of illustration, but not limitation:
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a. electric, water, sewer and other utility charges; accounting, legal and other consulting fees;
b. the cost and expense of insurance for which Landlord may be responsible pursuant to this
Lease, or which Landlord deems necessary in connection with the Project;
c. losses or damage attributable to deductible amounts under such insurance policies;
d. the cost janitorial services (including, without limitation, required supplies, trash removal and
hauling), security, and labor;
e. utilities surcharges;
f. expenditures required in order to comply with “Laws” (as defined in Section 7(a) below);
g. costs incurred in the management of the Project including supplies, wages and salaries of
employees used in the management, operation and maintenance of the Project, and payroll taxes and similar governmental charges
with respect thereto, Project management office rental, and a management fee (not to exceed three percent (3%) of gross Project
revenues during the initial five (5) years of the Term and thereafter not to exceed market management fees payable in connection
with the management of Comparable Buildings);
h. the cost of supplies, materials, equipment and tools required in the maintenance and repair of
the Project; the cost of repair and maintenance (including, without limitation, costs of rental of personal property used in
maintenance) of the structural portions, vertical transportation systems, and other mechanical and utility systems of the Project and
other portions of the Project to be maintained and repaired by Landlord (including, without limitation, the plumbing, heating,
ventilating, air conditioning and electrical systems installed or furnished by Landlord);
i. the costs and expenses of gardening and landscaping, maintenance of signs (other than
amounts allocable to maintenance of signs identifying particular Project occupants) and all other upkeep of the Common Areas;
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j. personal property taxes levied on or attributable to personal property used in connection with
the Project;
k. reasonable audit or verification fees (other than costs of auditing or verification by Project
tenants); and costs and expenses of general repairs and maintenance, resurfacing, painting, lighting and similar items. In the event
the Rentable Area of the Project is less than ninety-five percent (95%) occupied during the Base Year or any Comparison Year
during the Term, then in calculating Operating Expenses for such year, the variable components of Operating Expenses shall be
“grossed up” to reflect such amounts as would have been incurred had the Rentable Area of the Project been ninety-five percent
(95%) occupied during such year. If the property tax assessment for all or any portion of the Project (or Tax Expenses) for the
Base Year or any Comparison Year during the Term does not reflect a real estate tax assessment (or Tax Expenses) for a fully
leased, built out and occupied Project (such that future leasing, tenant improvements and/or occupancy result in an increased real
estate tax assessment (and/or increased Tax Expenses)), then Tax Expenses for such year shall be adjusted, on a basis consistent
with sound and neutral accounting and tax principles, to reflect a real estate tax assessment (and Tax Expenses) for a fully leased,
built out and occupied Project.
6. Notwithstanding anything to the contrary contained in this Lease, “Operating Expenses” shall not include
any of the following:
a. any ground lease rental;
b. capital expenditures to the extent the same constitute upgrades as opposed to repairs or replacements;
the parties further hereby agreeing with respect to capital expenditures, that (A) if Tenant’s share of any capital expenditure
included in Operating Expenses is more than $60,000.00 $15,000.00, then such capital expenditure shall be amortized over its
reasonable useful life and annual amortization of such expenditure shall be included in Operating Expenses during each year of
such amortization and (B) that Tenant’s share of Operating Expenses shall not include amortization of capital expenditures
pursuant to clause (A) above in the aggregate of more than $0.50 per year per square foot of Rentable Area of the Premises;
12
c. rentals for items constituting capital expenditures (except when needed in connection with normal
repairs and maintenance of the Project) to the extent the same would not be includable in Operating Expenses under clause (2)
above if the applicable item had been purchased, rather than leased;
d. costs incurred of repair of damage to the Building to the extent reimbursed by insurance
proceeds, provided that insurance deductibles shall be included;costs incurred for restoration following condemnation to the
extent reimbursed by condemnation award or for repair of damage to the Building to the extent reimbursed by insurance
proceeds (provided that insurance deductibles, not to exceed $50,000.00 per casualty occurrence, shall be included in
Operating Expenses), and other costs reimbursed by insurers, warranties, governmental authorities, utility companies or any
other entity (other than cost reimbursements by other Project occupants as a part of their contribution to Operating Expenses);
e. costs, including permit, license and inspection costs and supervision fees, incurred with respect to
the installation of tenant improvements to Rentable Area within the Project or incurred in renovating or otherwise improving,
decorating, painting or redecorating vacant Rentable Area of the Project or advertising, promotional or other costs in order to
market space to potential tenants;
f. depreciation, amortization and interest payments, except on materials, tools, supplies and
vendor-type equipment purchased by Landlord to enable Landlord to supply services Landlord might otherwise contract for
with a third party where such depreciation, amortization and interest payments would otherwise have been included in the
charge for such third party’s services, all as determined in accordance with generally accepted accounting principles;
g. reserves for future expenses beyond anticipated expenses for the current year;
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h. marketing costs, including leasing commissions, attorneys’ fees in connection with the
negotiation and preparation of letters, deal memos, letters of intent, leases, subleases and/or assignments, space planning costs,
and other costs and expenses incurred in connection with lease, sublease and/or assignment negotiations and transactions with
present or prospective tenants or other occupants of the Project;
i. expenses in connection with services or other benefits which are not available to Tenant or repairs
or replacements to any utility systems which are dedicated to the use of a single other tenant or concession operator (where
comparable utility systems are not included in the Premises);
j. legal fees and related expenses and legal costs incurred by Landlord (together with any damages
awarded against Landlord) due to the violation by Landlord or any tenant of the terms and conditions of any lease of space in
the Project;
k. overhead and profit paid to Landlord or to subsidiaries or affiliates of Landlord for goods and/or
services in the Project to the extent the same exceeds the costs of such goods and/or services rendered by qualified,
unaffiliated third parties on a competitive basis;
l. interest, principal, points and fees on debts or amortization on any mortgage or mortgages or any
other debt instrument encumbering the Project;
m. Landlord’s general corporate overhead and general and administrative expenses not specifically
incurred in the management, maintenance and operation of the Project, and costs of entertainment, dining, automobiles or
travel for Landlord’s employees;
n. costs incurred in correcting any non-compliance of the Project with Laws where such
non-compliance was existing as of the delivery of possession of the Premises to Tenant date of this Lease and the correcting
compliance work was then required to be performed (as opposed to pre-existing non-compliance where compliance work is
not legally mandated in the absence of subsequent improvements, alterations or change in use);
14
o. Tax Expenses;
p. costs arising from the presence of any existing Hazardous Materials (under current interpretations
of applicable Laws as of the date of this Lease) within, upon or beneath the Project;
q. costs arising from Landlord’s the negligence or willful misconduct of Landlord or any Project
tenant;
r. costs arising from Landlord’s charitable or political contributions;
s. and costs (other than ordinary maintenance) for sculpture, paintings and other objects of art.;
t. interest and penalties resulting from Landlord’s failure to pay Operating Expense items when
due;
u. accountants’ fees, arbitration fees and other costs and expenses incurred in connection with any
audit of Operating Expenses by any past or present Project tenant or occupant;
v. costs associated with the operation of the business of the partnership or entity which constitutes
Landlord as the same are distinguished from the costs of the operation of the Project, including partnership accounting and
legal matters, costs of defending any lawsuits with any mortgagee, costs of selling, syndicating, financing, mortgaging or
hypothecating any of Landlord’s interest in the Project, costs of any disputes between Landlord and its employees (if any) not
engaged in the operation of the Project, disputes of Landlord with Project management, or outside fees paid in connection with
disputes with other Project tenants or occupants;
15
w. costs of installing, maintaining or lighting any signs identifying Landlord, Landlord’s manager,
leasing information respecting the Project or any Project tenants;
x. Project management office rental to the extent such rental exceeds the fair market rental for such
space or the extent the space utilized therefor exceeds the space utilized for management offices in comparably sized
Comparable Buildings;
y. costs of new or additional landscaping in the nature of upgrades as opposed to replacements;
z. any bad debt loss or reserves for bad debt;
aa. costs of electricity use by any Project tenant in excess of seven (7) watts connected load per
square foot of Usable Area for office electrical power and lighting (exclusive of HVAC or other base Building systems);
bb. flowers, balloons or gifts to any existing or prospective Project tenants, vendors or contractors, or
any tenant relations parties, events or promotions (unless otherwise consented to by Tenant);
cc. costs of any training or incentive programs other than for tenant life safety or other
governmentally mandated or governmentally recommended programs;
dd. costs in removing or storing property of former Project tenants; and
ee. premiums for earthquake insurance.
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The foregoing list of exclusions from Operating Expenses is intended to function solely as an exclusionary listing and,
except as specifically provided above, shall not be interpreted to permit or authorize any cost or expense which would not
otherwise be considered to be an Operating Expense under the other provisions of this Lease.
7. In addition, in calculating Operating Expenses, if, other than as a result of any governmental requirements or
other occurrence(s) beyond the reasonable control of Landlord, following the Base Year any new category is added to Operating
Expenses or any existing category is deleted from Operating Expenses (such as, by way of example and without limitation,
Landlord’s obtaining flood insurance for the Building if not obtained during the Base Year or no longer obtaining flood insurance if
obtained in the Base Year), and/or the scope of any previously existing category of Operating Expenses is materially increased or
materially decreased (such as, by way of example and without limitation, Landlord’s materially increasing or materially decreasing
the limit of Landlord’s liability insurance maintained pursuant to Section 17(b)(ii) below above or below, as applicable, the limit of
such insurance during the Base Year), then (1) during such time as the costs relating to such new category and/or such increased
scope are included in Operating Expenses, the calculation of Base Year Operating Expenses shall be increased to reflect such costs
as would have been incurred had such new category item been included in the Base Year and/or had such increased scope been
applicable during the Base Year, as applicable, giving due consideration to what the costs for such new category and/or increased
scope item(s) would have been at the time of the Base Year (as opposed to the costs therefor in the Comparison Year in which such
item(s) are first included in Operating Expenses); and (2) during such time as the costs relating to such previously existing
category is no longer included in Operating Expenses and/or such decreased scope is included in Operating Expenses, the
calculation of Base Year Operating Expenses shall be decreased to reflect such costs as would have been incurred had such
previously existing category item not been included in the Base Year and/or had such decreased scope been applicable during the
Base Year, as applicable. In addition, if any Project tenant (a “Direct Tenant”) pays directly to the applicable utility or service
provider any item which is included in Operating Expenses for other Project tenants (including, by way of example and without
limitation, a Project tenant who separately contracts and pays for provision of janitorial service to its premises), then such Direct
Tenant’s premises shall be deemed vacant Rentable Area subject to the “gross up” provision for purposes of calculating such item
of Operating Expenses. Operating Expenses for any particular year shall not include amounts incurred with respect to a prior year.
17
8. As used herein, the term “Tax Expenses” shall include any form of assessment, license fee, license tax,
business license fee, transit tax or fee, commercial rental tax, levy, charge, penalty (other than tax penalties incurred as a result
of Landlord’s negligence, inability or unwillingness to make payments when due) tax or similar imposition, imposed by any
authority having the direct power to tax, including any city, county, state or federal government, or any school, agricultural,
lighting, drainage, transportation or other improvement or special assessment district thereof, as against any legal or equitable
interest of Landlord in the Project and the Premises, or any portion thereof, including, but not limited to, the following:
a. any tax on Landlord’s right to Rent or right to other income from the Premises or as against
Landlord’s business of leasing the Premises;
b. any assessment, tax, fee, levy or charge in substitution, partially or totally, of any assessments,
taxes, fees, levies and charges that may be imposed by governmental agencies for such services as fire protection, street,
sidewalk and road maintenance, refuse removal and for other governmental services formerly provided without charge to
property owners or occupants. It is the intention of Tenant and Landlord that all such new and increased assessments, taxes,
fees, levies and charges be included within the definition of Tax Expenses for the purposes of this Lease;
c. any assessment, tax, fee, levy or charge allocable to or measured by the area of the Premises or
the Rent payable hereunder, including, without limitation, any gross income tax or excise tax levied by the state, city or
federal government, or any political subdivision thereof, with respect to the receipt of such Rent, or upon or with respect to the
possession, leasing, operating, management, maintenance, alteration, repair, use or occupancy by Tenant of the Premises, or
any portion thereof; and
d. any assessment, tax, fee, levy or charge upon this transaction or any document to which Tenant is
a party creating or transferring an interest or an estate in the Premises, or based upon a reassessment of the Project, or any
portion thereof, due to a change in ownership or transfer of all or part of Landlord’s interest in this Lease, the Project, or any
portion thereof (except to the extent specifically excluded pursuant to clause (A) below).
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Notwithstanding any provision of this Section 6 expressed or implied to the contrary, (A) Tax Expenses shall not include (I)
Landlord’s federal or state net income, franchise, documentary transfer, inheritance or estate taxes; (II) tax penalties incurred
as a result of Landlord’s negligence, inability or unwillingness to make payments when due; or(III) special assessments or
special taxes initiated by Landlord as a means of financing improvements to the Project; or (IV) during the Initial Term (but
not the Extended Term(s)), that portion of any increase in Tenant’s Share of Tax Expenses by more than One Hundred
Thousand Dollars ($100,000.00) to the extent resulting from reassessments due to “changes in ownership” (as defined in
Division 1, Part 0.5, Chapter 2 of the California Revenue and Taxation Code) of all or any portion of the Project; (B) for
purposes of calculation of Tax Expenses, assessments shall be treated as if paid in the maximum number of installments
permitted by applicable Laws (with interest on any unpaid balances), whether or not so paid in installments; and (C) there
shall be no duplication of items included in Tax Expenses and items included in Operating Expenses. Tax Expenses for any
particular year shall not include amounts incurred with respect to a prior year. Tenant shall have such rights to reasonably
contest the validity or amount of Taxes Tax Expenses as are permitted by applicable Laws, and Landlord shall reasonably
cooperate with Tenant in connection therewith, provided that no such contest shall in any manner limit Tenant’s obligation to
pay Tenant’s Tax Expenses Excess as and when required under this Lease.
B. 1. For each Comparison Year during the Term following the expiration of the Base Year, Tenant
shall pay to Landlord, in the manner set forth in this Section 6(b), (1) the amount, if any, by which Tenant’s Percentage of
Operating Expenses for such Comparison Year increase over the Tenant’s Percentage of Operating Expenses for the Base Year
(the amount of such increase is referred to in this Lease as the “Tenant’s Operating Expenses Excess”); plus (2) the amount, if
any, by which Tenant’s Percentage of Tax Expenses for such Comparison Year increase over the Tenant’s Percentage of Tax
Expenses for the Base Year (the amount of such increase is referred to in this Lease as the “Tenant’s Tax Expenses Excess”).
The sum of Tenant’s Operating Expenses Excess plus Tenant’s Tax Expenses Excess is referred to herein as “Tenant’s
Expenses Excess”. If the final Comparison Year includes time beyond the expiration of the Term or earlier termination of this
Lease, the calculation of Tenant’s Expenses Excess for such Comparison Year shall be equitably prorated by Landlord.
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2. Tenant shall not be obligated to make estimated payments with respect to any estimated Tenant’s
Expenses Excess until the expiration of the Base Year. On or before the expiration of the Base Year, Landlord shall deliver to
Tenant a statement (the “Estimate Statement”) wherein Landlord shall estimate the Tenant’s Expenses Excess for the initial
Comparison Year (the amount of such estimated Tenant’s Expenses Excess for any Comparison Year, as such estimate may be
adjusted from time to time as hereinafter provided, if referred to herein as the “Estimated Excess”). The Estimate Statement
shall include a breakdown of estimated Operating Expenses by general category line items. Any Estimated Excess for the
initial Comparison Year pursuant to such Estimate Statement shall be paid in equal installments on the first day of each
calendar month remaining during the first Comparison Year following the expiration of the Base Year. Other than during such
initial Comparison Year, payments by Tenant of the Estimated Excess shall be made in equal monthly installments on the first
day of each calendar month during the applicable Comparison Year on the basis of Landlord’s most recently delivered
Estimate Statement. On or before May 1st of each Comparison Year during the Term following the initial Comparison Year,
Landlord shall endeavor to deliver to Tenant an Estimate Statement of the Tenant’s Expenses Excess for the then current
Comparison Year. In addition, Landlord shall have the right, not more than semi-annually, to deliver a revised Estimate
Statement for a current Comparison Year, if Landlord in good faith reasonably determines that there is a material inaccuracy or
omission in the then applicable Estimate Statement for such Comparison Year. Following Landlord’s delivery of such a new
Estimate Statement for the current Comparison Year, Tenant shall pay to Landlord, within thirty (30) days of the delivery of
such Estimate Statement, the difference between the Estimated Excess under such new Estimate Statement and the Estimated
Excess under the prior Estimate Statement prorated for the then elapsed portion of the then current Comparison Year, and
Tenant shall thereafter (beginning with the first calendar month following receipt of such new Estimate Statement) make
monthly payments with respect to the Estimated Excess on the basis of such new Estimate Statement until Tenant’s receipt of
a subsequent Estimate Statement.
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3. On or before May 1st following each Comparison Year during the Term of this Lease, Landlord
shall endeavor to deliver to Tenant a statement (“Actual Statement”) which states the actual Tenant’s Percentage of Operating
Expenses and the actual Tenant’s Percentage of Tax Expenses for such preceding Comparison Year. The Actual Statement
shall include a breakdown of Operating Expenses by general category line items. If the Actual Statement reveals that the
actual Tenant’s Expenses Excess for such preceding Comparison Year exceeds the total amount of Tenant’s payments of
Estimated Excess for such preceding Comparison Year, Tenant shall pay Landlord the difference in a lump sum within thirty
(30) days of receipt of the Actual Statement. If the Actual Statement reveals that the actual Tenant’s Expenses Excess for such
preceding Comparison Year is less than the total amount of Tenant’s payments of Estimated Excess for such preceding
Comparison Year, Landlord shall credit such overpayment toward Tenant’s Rent obligations next coming due under this Lease.
4. Any delay or failure by Landlord in delivering any Estimate Statement or Actual Statement
pursuant to this Section 6(b) shall not constitute a waiver of its right to require Tenant’s payment of Tenant’s Expenses Excess
nor shall it relieve Tenant of its obligations pursuant to this Section 6; provided that Tenant shall not be liable for the portion
of Tenant’s Expenses Excess, if any, related to a particular Comparison Year which is not billed to Tenant by Landlord within
(1) eighteen (18) months following the date when Tenant should have received the Actual Statement for such Comparison
Year, as to items constituting Operating Expenses; or (2) thirty-six (36) months following the date when Tenant should have
received the Actual Statement for such Comparison Year, as to items constituting Tax Expenses.
5. In the event the Term has expired and Tenant has vacated the Premises, at such time as the final
determination has been made regarding Tenant’s Percentage of Operating Expenses and Tenant’s Percentage of Tax Expenses
for the Comparison Year in which this Lease terminated (which determination shall be timely made), Tenant shall, within
thirty (30) days following receipt of the Actual Statement for such final Comparison Year, pay any amounts due as a result of
the actual Tenant’s Expenses Excess for such Comparison Year exceeding Estimated Excess paid with respect thereto and,
conversely, any overpayment made in the event the actual Tenant’s Expenses Excess for such Comparison Year are less than
Estimated Excess paid with respect thereto shall be remitted to Tenant by Landlord concurrently with Landlord’s delivery of
the Actual Statement for such final Comparison Year. Nothing contained in this Section 6 shall in any manner result in a
decrease in Monthly Base Rent. Further, in the event that Operating Expenses for any Comparison Year are less than
Operating Expenses for the Base Year and/or Tax Expenses for any Comparison Year are less than Tax Expenses for the Base
Year, Tenant shall not receive a credit against any Rent payable hereunder.
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6. Tenant and its duly authorized representatives shall have the right to audit and copy the records of
Landlord related to Operating Expenses and Tax Expenses with respect to any calendar year within six (6) months two (2)
years following receipt of the applicable Actual Statement for such calendar year, upon not less than thirty (30) days’ prior
written notice to Landlord, during normal business hours at Landlord’s business offices; provided that (1) Tenant shall not
conduct more than one (1) such audit in any calendar year, (2) such information shall be kept in the strictest confidence by
Tenant, (3) Tenant shall supply Landlord with a copy of the results of such audit within ten (10) days following Tenant’s
receipt of the same, and (4) in no event may any such audit or inspection be performed by a person or entity being
compensated on a contingency fee basis or based upon a share of any refund obtained by Tenant. In the event Tenant in good
faith disputes the accuracy of any Actual Statement on the basis of any such audit, such dispute must be alleged in reasonable
detail in written notice to Landlord within ninety (90) days following Tenant’s completion of such audit. If actual Tenant’s
Operating Expenses Excess is or Tax Expenses are determined to have been overstated or understated by Landlord for any
calendar year, the parties shall within thirty (30) days thereafter make such adjustment payment or refund as is applicable, and
if actual Operating Expenses or Tax Expenses are determined to have been overstated by Landlord for any calendar year by in
excess of five three percent (5%)(3%), Landlord shall pay the reasonable cost of Tenant’s audit. Tenant shall pay in a timely
manner as required by this Lease any amounts stated as due on the Actual Statement, provided that such payment shall not
waive any right to audit and/or dispute by Tenant as set forth herein.
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SAMPLE TENANT ORIENTED WISH LIST OF OPERATING EXPENSE EXCLUSIONS
Notwithstanding anything to the contrary set forth in this Lease, including, without limitation, the terms of this Section, Operating
Expenses shall not include:
(1) any payments under a ground lease or master lease relating to the Project;
(2) costs of a capital nature, including, without limitation, capital improvements, capital repairs and capital
equipment; except for those (i) acquired to reduce Operating Expenses (amortized at an annual rate reasonably calculated to
equal the amount of Operating Expenses to be saved in each calendar year throughout the Term of the Lease, as reasonably
determined at the time Landlord elected to proceed with the capital improvement or acquisition of the capital equipment to
reduce Operating Expenses), together with interest at the actual interest rate incurred by Landlord, or (ii) incurred after the
Commencement Date in order to comply with any governmental law or regulation that was enacted subsequent to the
Commencement Date (but specifically not including any re-enactment or subsequent codification, local or otherwise, of
any laws or regulations existing as of the Commencement Date, including without limitation the Americans with
Disabilities Act or any state or local codifications thereof) provided that such capital costs shall be amortized over their
useful life, together with interest at the actual interest rate incurred by Landlord; all other capital expenditures,
improvements and repairs shall be excluded from Operating Expenses;
(3) rentals for items which if purchased, rather than rented, would constitute a capital improvement or equipment;
(4) costs incurred by Landlord for the repair of damage to the Building or for any other part of the Project pursuant
to the terms of Section 15 of this Lease or otherwise;
(5) the cost of any item reimbursable by insurance or condemnation proceeds or which would be reimbursable from
insurance required to be maintained by Landlord under this Lease (or similar insurance on parts of the Project other than
the Building);
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(6) costs, including permit, license and inspection costs, incurred with respect to the installation of tenants’ or other
occupants’ improvements made for tenants or other occupants in the Project or incurred in renovating or otherwise
improving, decorating, painting or redecorating space for tenants or other occupants of the Project;
(7) depreciation and amortization;
(8) marketing and promotional costs, including but not limited to leasing commissions, real estate brokerage
commissions, and attorneys’ fees in connection with the negotiation and preparation of letters, deal memos, letters of intent,
leases, subleases and/or assignments, space planning costs, and other costs and expenses incurred in connection with lease,
sublease and/or assignment negotiations and transactions with present or prospective tenants or other occupants of the
Project;
(9) costs of services, utilities, or other benefits which are not offered to Tenant or for which Tenant is charged for
directly but which are provided to another tenant or occupant of the Project, including, but not limited to, above Building
standard heating, ventilation and air-conditioning, janitorial services and exclusive use Common Areas;
(10) costs incurred by Landlord due to any violation of the terms and conditions of any lease of space or occupancy
agreement in the Project;
(11) costs and the overhead and profit increment paid to Landlord, to affiliates or partners of Landlord, partners or
affiliates of such partners, or affiliates of Landlord for goods and/or services in the Project to the extent the same exceeds
the costs or the overhead and profit increment, as the case may be, of such goods and/or services rendered by unaffiliated
third parties on a competitive basis in Comparable Buildings;
(12) interest, principal, attorneys’ fees, environmental investigations or reports, points, fees and other lender costs
and closing costs on debts or amortization on any mortgage or mortgages or any other debt instrument encumbering the
Building or the Project or any part thereof or on any unsecured debt;
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(13) Landlord’s general corporate overhead and general and administrative expenses, including costs relating to
accounting, payroll, legal and computer services which are partially or totally rendered in locations outside the Project;
(14) salaries of officers, executives or other employees of Landlord, any affiliate of Landlord, or partners or
affiliates of such partners or affiliates, other than any personnel engaged exclusively in the management, operation,
maintenance, and repair of the Building (but not leasing or marketing), and working in the Building management office and
not typically included in the management fee being paid and included in Operating Expenses; provided such individuals do
hold a position which is generally considered to be higher in rank than the position of the manager of the Building or the
chief engineer of the Building;
(15) all items and services for which Tenant or any other tenant in the Project is required to reimburse Landlord
(other than through Tenant’s Percentage or any other tenant’s share of Operating Expenses);
(16) advertising and promotional expenditures, including but not limited to tenant newsletters and Project or
Building promotional gifts, events or parties for existing or future occupants, and the costs of signs (other than the Building
directory) in or on the Project identifying the owner of the Building or any other building in the Project or other tenants’
signs and any costs related to the celebration or acknowledgement of “Holidays,” as that term is defined in Section ____,
below;
(17) electric power or other utility costs for which any tenant directly contracts with the local public service
company;
(18) costs incurred in connection with any governmental laws and regulations applicable to the Project, including,
but not limited to life, fire and safety codes, including any codes relating to the installation or existence of fire sprinklers,
environmental and “Hazardous Materials” laws and federal, state or local laws or regulations relating to disabled access,
including, but not limited to, the Americans With Disabilities Act;
(19) costs, penalties, fines, or awards and interest incurred as a result of Landlord’s negligence in Landlord’s
operation of the Project, violations of law, negligence or inability or unwillingness to make payments and/or to file any
income tax, other tax or informational returns when due;
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(20) costs which are covered by and reimbursable under any contractor, manufacturer or supplier warranty;
(21) costs arising from the negligence, or intentional acts of Landlord or its agents, or of any other tenant, or any vendors, contractors, or providers of materials or services selected, hired or engaged by Landlord or its agents;
(22) costs arising from the presence or removal of Hazardous Materials located in the Building or the Project, including, without limitation, any costs incurred pursuant to the requirements of any governmental laws, ordinances, regulations or orders relating to health, safety or environmental conditions, including but not limited to regulations concerning asbestos, soil and ground water conditions or contamination regarding hazardous materials or substances;
(23) costs arising from Landlord’s charitable or political contributions;
(24) costs arising from any type of insurance maintained by Landlord which is not required or allowed to be maintained by Landlord pursuant to Section ___ of this Lease;
(25) costs for sculpture, paintings or other objects of art or the insuring, repair or maintenance thereof;
(26) costs (including in connection therewith all attorneys, fees and costs of settlement judgments and payments in lieu thereof) arising from claims, disputes or potential disputes in connection with potential or actual claims, litigation or arbitrations pertaining to Landlord and/or the Building and/or the Project;
(27) costs, including but not limited to attorneys’ fees associated with the operation of the business of the partnership or entity which constitutes Landlord as the same are distinguished from the costs of operation of the Building, including partnership accounting and legal matters, costs of defending any lawsuits with any mortgagee, costs of selling, syndicating, financing, mortgaging or hypothecating any of Landlord’s interest in the Building, Project or any part thereof, costs of any disputes between Landlord and its employees, disputes of Landlord with Building or Project management or personnel, or outside fees paid in connection with disputes with other tenants;
(28) costs incurred in removing and storing the property of former tenants or occupants of the Project;
(29) the cost of any work or services performed for any tenant (including Tenant) at such tenant’s cost;
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(30) (i) the cost of installing, operating and maintaining any specialty service, observatory, broadcasting facilities,
luncheon club, museum, athletic or recreational club, or child care facility, and (ii) the cost of installing, operating and
maintaining any other service operated or supplied by or normally operated or supplied by a third party under an agreement
between a third party and a landlord;
(31) the cost of correcting defects in the design, construction or equipping of the Project or in the Project
equipment;
(32) the cost of any work or service performed for any tenant of the Project (other than Tenant) to a materially
greater extent or in a materially more favorable manner than that offered to Tenant;
(33) premiums for insurance to the extent Landlord is directly (and not through Operating Expenses) reimbursed
therefor;
(34) the cost of furnishing and installing non-Building standard replacement bulbs and ballasts in tenant spaces;
(35) the cost of any labor, service, materials, supplies or equipment, which is not comparable to the prevailing
market rate for such labor, service, materials, supplies or equipment at the time in the Comparable Buildings;
(36) the cost of any parties, ceremonies or other events for tenants or third parties which are not tenants of the
Building, whether conducted in the Building, Project or in any other location;
(37) reserves of any kind, including but not limited to replacement reserves, and reserves for bad debts or lost rent
or any similar charge not involving the payment of money to third parties;
(38) costs incurred by Landlord in connection with rooftop communications equipment of Landlord or other
persons, tenants or occupants on the Building or the Project;
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(39) costs relating to any management office for the Building including rent, or for any other management office in
the Project;
(40) all assessments and premiums shall be paid by Landlord in the maximum number of installments permitted by
law and shall not be included as Operating Expenses except in the year in which the assessment or premium installment is
actually paid;
(41) payment of any management fee, whether paid to Landlord or an outside managing agent, in excess of the
lesser of (i) the prevailing management fee per rentable square foot charged in the Comparable Buildings, and (ii) an
amount equal to the product of (A) two percent (2%) and (B) the actual amount of gross revenues for the Building;
(42) any costs expressly excluded from Operating Expenses or Real Property Taxes elsewhere in this Lease or
included as Real Property Taxes;
(43) costs for services normally provided by a property manager where Operating Expenses already include a
management fee;
(44) costs incurred in connection with the original construction of the Building or the Project or any addition to the
Project or in connection with any renovation, alteration or major change in the Building or the Project, including but not
limited to the addition or deletion of floors;
(45) any costs, fees, dues, contributions or similar expenses for industry associations or similar organizations;
(46) any costs associated with the purchase or rental of furniture, fixtures or equipment for any management,
security, engineering, or other offices associated with the Project and Common Areas or for Landlord’s offices or the offices
of other landlords of the Project or for the Common Areas of the Building or Project;
(47) any compensation paid to clerks, attendants or other persons in commercial concessions operated by Landlord
in the Building or Project;
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(48) the entertainment expenses and travel expenses of Landlord, its employees, agents, partners and affiliates;
(49) costs incurred by Landlord due to the violation by Landlord of the terms and conditions of any contract or
agreement relating to the Project or any part thereof, including any “Project Documents,” as that term is defined below;
(50) costs of traffic studies, environmental impact reports, transportation system management plans and reports, and
traffic mitigation measures or due to studies or reports relating to obligations or the terms of the Project Documents;
(51) all assessments and special assessments due to deed restrictions, Project Documents and/or owners associations
which accrue against the Project;
(52) any improvement installed or work performed or any other cost or expense incurred by Landlord in order to
comply with the requirements for obtaining or renewal of a certificate of occupancy for the Building or Project or any space
therein;
(53) any fees, bond costs or assessments levied on the Project by any rapid transit district (or any other
governmental entity having the authority to impose such fees, bond costs or assessments for mass transit improvements);
(54) any costs or expenses relating to any provisions of any development agreements, owner’s participation
agreement, covenants, conditions, restrictions, conditional use permits, easements or other instruments encumbering the
Project or any part thereof or other agreement relating to the development, entitlement, construction or financing of the
Project (collectively, the “Project Documents”), including any initial payments or costs or ongoing payments or costs made
in connection with any child-care facilities, traffic demand management programs, transportation impact mitigation fees,
water and sewage conservation, recycling, housing replacement and linkage fees, special assessment districts, infrastructure
and transportation assessments, art programs, or parking requirements and programs;
(55) Real Property Taxes allocable to the tenant improvements of Tenant or other tenants or occupants in the
Building or Common Areas which are in excess of $ per rentable square foot;
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(56) any costs recovered by Landlord to the extent such cost recovery allows Landlord to recover more than 100%
of Operating Expenses for any Lease Year from tenants of the Building, and in connection therewith, Landlord shall reduce
the amount of Operating Expenses by any refund or discount received by Landlord in connection with any expenses
previously included in Operating Expenses;
(57) any profit made by Landlord in connection with Landlord’s collections of Operating Expenses;
(58) any costs for which Landlord has been reimbursed or receives a credit, refund or discount, provided if Landlord
receives the same in connection with any costs or expenditures previously included in Operating Expenses for a Lease Year,
Landlord shall immediately reimburse Tenant for any overpayment for such previous Lease Year;
(59) any costs incurred in connection with the installation, operation, repair and maintenance of all elevators in the
Building;
(60) any costs incurred in connection with any systems and equipment, including without limitation, any Building
HVAC System, which do not service the Premises;
(61) costs, expenses, taxes or assessments associated with or relating to separate items or categories or subcategories
of Operating Expenses to the extent such items, categories or subcategories were not part of Operating Expenses for the
Base Year;
(62) the portion of any item of Operating Expenses which increases in excess of market increases over the amount
of such item included within Operating Expenses for the Base Year.
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To the extent that an expense is not specifically included or excluded as a component of Operating Expenses in the
definition of “Operating Expenses,” whether such expense shall be treated as an Operating Expenses shall be determined in
accordance with generally accepted accounting principles consistently applied. After written request (the “Operating Expenses
Notice”) by Tenant, at Landlord’s option, either (i) Landlord shall diligently pursue claims for reductions in the Operating
Expenses, (ii) Tenant may pursue such claims with Landlord’s concurrence, in the name of Landlord, or (iii) Tenant may pursue
such claims in the name of Landlord without Landlord’s concurrence. In the event that Landlord does not elect either item (i) or
(ii), above, within thirty (30) days of receipt of the Operating Expenses Notice, Tenant shall thereafter have the right to pursue such
claims under item (iii), above. If either Landlord agrees to pursue such claims or concurs in the decision to pursue such claims but
elects to have them pursued by Tenant, the cost of such proceedings shall be paid by Landlord and included in Operating Expenses
when such expenses are paid. If Tenant pursues such claims without obtaining Landlord’s concurrence and such contest is
successful, then the cost of such proceedings, but in no event more than the cumulative savings achieved, shall be included in
Operating Expenses when paid by Tenant, and Landlord shall pay or reimburse to Tenant such cost.
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COMPARISON OF SAMPLE RETAIL (NET) LEASE PROVISIONS
(“REDLINED” TO SHOW CHANGES FROM LANDLORD’S INITIAL DRAFT)
4. PRO RATA SHARE OF COMMON AREA EXPENSES, TAXES AND INSURANCE.
4.1 Pro Rata Share of Common Area Expenses, Taxes and Insurance. Commencing on the Rental Commencement
Date, Tenant shall pay to Landlord, as additional rent, each month, in advance, during the Term, one-twelfth (1/12th) of an amount
reasonably estimated by Landlord to be Tenant’s Pro Rata Share (as herein defined) of the total annual Common Area Expenses,
Real Property Taxes and the costs of Landlord’s Insurance, as such terms are defined in Articles 5, 6 and 7, respectively, of this
Lease; except, however, the first month’s estimated Common Area Expenses, Real Property Taxes and the costs of Landlord’s
Insurance shall be payable by Tenant upon execution of this Lease. “Tenant’s Pro Rata Share” shall equal the ratio of the total
square feet of the floor area of the Premises to the total square feet of the floor area of all the buildings constructed in the Shopping
Center, excepting any outdoor retail areas, restaurant seating areas, mezzanines not used for the sale or display of merchandise,
balcony, subterranean or basement space, as of the end of each calendar year. Tenant’s Pro Rata Share shall be subject to
adjustment by Landlord to reflect Tenant’s share of a particular cost that is not applicable to all the tenants within the Shopping
Center. In furtherance of the foregoing, Landlord shall have the right to allocate certain Common Area Expenses, Real Property
Taxes and the costs of Landlord’s Insurance to the occupants in the Shopping Center to which such Common Area Expenses, Real
Property Taxes and/or costs of Landlord’s Insurance are allocable, in which event Tenant’s share of such costs (the “Cost Pool”)
shall be as follows: (A) in the event Tenant is one of the occupants participating in such Cost Pool, its share of such Common Area
Expenses, Real Property Taxes and/or costs of Landlord’s Insurance, as applicable, shall be calculated in the manner set forth in
Article 4, but the denominator used to determine such share shall exclude those occupants not participating in such Cost Pool; or
(B) in the event Tenant is not one of the occupants participating in such Cost Pool, its share of such Common Area Expenses, Real
Property Taxes and/or costs of Landlord’s Insurance, as applicable, shall exclude the Cost Pool and shall be calculated in the
manner set forth in Article 4, but the denominator used to determine such share shall exclude those occupants participating in such
Cost Pool. Landlord may adjust its estimate of such expenses at the end of any calendar quarter on the basis of Landlord’s
experience and reasonably anticipated costs. FollowingWithin ninety (90) days following the end of each calendar year (and after
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the date of expiration or sooner termination of this Lease), Landlord shall furnish to Tenant a statement showing in reasonable
detail the Common Area Expenses, Real Property Taxes and costs of Landlord’s Insurance during such calendar year (or portion
thereof prior to the expiration or sooner termination of this Lease). Tenant shall not be responsible for the payment of any
additional costs if Landlord’s statement is received more than one hundred eighty (180) days after the end of the preceding
calendar year. If Tenant’s share of such costs exceeds Tenant’s payments so made, Tenant shall pay Landlord the deficiency within
twenty (20thirty (30) days after receipt of such statement. If such payments exceed Tenant’s share of such costs, Tenant shall be
entitled to credit the excess against payments for such costs next thereafter to become due Landlord as set forth above or at
Tenant’s option, Landlord shall immediately refund such amounts. Landlord shall keep safe and intact at Landlord’s principal
offices located in the continental United States all of the records, books, accounts and other data relating to such costs.
Tenant or its designated agent shall have the right at its own cost and expense to audit and/or inspect Landlord’s
records, books, accounts and other data relating to such costs. Tenant shall give Landlord not less than ten (10) days’ written notice
of its intention to conduct any such audit. If, as a result of such audit, it is determined that the amount paid by Tenant for the
calendar year under consideration has been overpaid, Landlord shall promptly rebate to Tenant the overpayment or, at Tenant’s
election, Tenant may offset the amount of the overpayment against rent becoming due. If, as a result of such audit, it is
determined that the amount paid by Tenant for such costs has been overpaid by more than three percent (3%), then, in addition to
rebating to Tenant the overpayment, Landlord shall also pay the reasonable costs incurred by Tenant for such audit within thirty
(30) days of Landlord’s receipt of Tenant’s demand for the same and copies of all bills or invoices on which such cost is based. In
the event Landlord does not reimburse Tenant for such audit costs within such 30-day period, Tenant may offset such amount
against rent becoming due plus interest at Interest Rate specified in Article 19. Tenant’s failure to give Landlord written notice of
any objection to the statement within twelve (12) months after the statement is sent shall constitute a waiver of any objection or
inquiry Tenant may have about the statement or for any examination of Landlord’s records. Upon the expiration of the Term or
earlier termination of this Lease and determination of actual Common Area Expenses, Real Property Taxes and costs of Landlord’s
Insurance during the calendar year including the date of the expiration of the Term or earlierUpon termination of this Lease, if
Tenant is not in default hereunder, Landlord shall promptly refund to Tenant the amount of any excess less any amounts then owing
from Tenant to Landlord..
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Tenant’s right to audit is subject to the following limitations:
(i) Tenant must utilize its own qualified employees or employ a recognized accounting firm or other
qualified accountant or professional to conduct the audit and may not have a contingent fee arrangement with the person or
firm engaged to perform the audit;
(ii) Tenant must elect to conduct its audit within twelve (12) months following Tenant’s receipt of
Landlord’s annual statement of Common Area Expenses, Real Property Taxes and costs of Landlord’s Insurance (but no more
than once in any calendar year), time being deemed of the essence (failing which the annual statement shall be deemed to be
correct);
(iii) The audit shall be conducted at Landlord’s designated offices during normal business hours and must not
unreasonably interfere with the conduct of Landlord’s business;
(iv) Tenant and its auditors shall be required to execute a confidentiality letter in form reasonably satisfactory
to Landlord, the effect of which will require Tenant and its auditors to refrain from divulging the contents and results of the
audit to any third person, except and to the extent that disclosure is required to potential lenders, partners, assignees or
purchasers of Tenant, governmental agencies or in the event of litigation, subpoena or governmental compliance;
(v) If Tenant shall have had an audit made for any calendar year, then Tenant shall provide Landlord with a
copy of the audit report.
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4.2 Common Area Expense Limitations. Notwithstanding the foregoing, Tenant’s Pro Rata Share of Common Area
Expenses, Real Property Taxes and the costs of Landlord’s Insurance (as herein defined), for the first full calendar year following
the Rental Commencement Date shall not exceed the amount of Six and 50/100 Dollars ($6.50) per square foot of floor area of the
Premises. After the expiration of the first (1st) full calendar year of the Lease Term and until the expiration of the Initial Term,
Tenant’s Pro Rata Share of “Controllable Common Area Expenses” (as herein defined) for each subsequent calendar year during
the Lease Term shall not increase by more than five percent (5%) on a “cumulative basis” (as herein defined) over Tenant’s Pro
Rata Share of Controllable Common Area Expenses for the prior calendar year (the “CAM Cap”). “Controllable Common Area
Expenses” shall mean total Common Area Expenses, excluding Real Property Taxes, Landlord’s Insurance costs, snow and ice
removal costs, utilities, trash removal, security costs, and any new improvements that are required to comply with law unless a part
of or a result of any remodel of the Shopping Center (such replacements and/or new improvements shall be amortized at the
Interest Rate over their useful life).
The term “cumulative basis” means that any sums which were excluded from Tenant’s Pro Rata Share of Common Area
Expenses because they exceeded the CAM Cap in any calendar year may be carried over to the following calendar year of the
Lease Term; provided, however, that in no event shall Tenant’s Pro Rata Share of Controllable Common Area Expenses payable to
Landlord for any year of the Lease Term exceed the CAM Cap for that year. If Tenant elects to extend the Lease Term pursuant to
Section 3.5, then effective on the first day of each Option Term (the “Option Term Commencement Date”) and continuing
through the end of the first full calendar year following the Option Term Commencement Date, Tenant’s Pro Rata Share of
Common Area Expenses shall be adjusted to reflect Tenant’s Pro Rata Share of the actual Common Area Expenses for the
Shopping Center for such period without regard to the CAM Cap. Thereafter, Tenant’s Pro Rata Share of Controllable Common
Area Expenses for each subsequent calendar year during the Option Term shall not increase by more than five percent (5%) on a
cumulative basis, described above, over Tenant’s Pro Rata Share of Controllable Common Area Expenses for the prior calendar
year of the Option Term. For clarification purposes, “Direct Expenses” (as herein defined) are not Common Area Expenses and as
such are not subject to the CAM Cap. The term “Direct Expenses” means any and all costs and expenses payable by Tenant under
this Lease in addition to Tenant’s Pro Rata Share of Common Area Expenses, Real Property Taxes and the costs of Landlord’s
Insurance. Direct Expenses include, without limitation, all costs and expenses payable by Tenant pursuant to Section 9.1
(Landlord’s Premises Maintenance Obligations), Article 10 (Utilities) and Section 16.2 (Pylon and Monument Sign Costs) of this
Lease.
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5. COMMON AREA.
5.1 Common Area. “Common Area” is defined as all areas and facilities within the Shopping Center not
appropriated to the exclusive occupancy of tenants, including, but not limited to, all vehicle parking spaces or areas, roads,
traffic lanes, driveways, sidewalks, pedestrian walkways, landscaped areas, signs, service delivery facilities, common storage
areas, common utility facilities and all other areas for non-exclusive use in the Shopping Center which may from time to time
exist. Common Areas shall include the roofs and exterior walls (other than storefronts) of buildings in the Shopping Center
(provided that use of such roofs and exterior walls shall be reserved to Landlord and any designee(s) of Landlord specifically
authorized to use all of any part thereof,, all shared utility systems to the point of entry to any individual leased premises and
all utility systems which are exterior to the buildings other than: (a) heating, ventilating and cooling system components or
elements which serve individual tenants, and (b) sewer laterals to the point of junction with a common sewer line, which shall
be the responsibility of individual tenant whose premises are served by such lateral.
5.2 Common Area Expenses. The term “Common Area Expenses” shall include, without limitation, all amounts paid
by Landlord for the maintenance, repair, replacement, operation and management of the Shopping CenterCommon Area, including
insurance covering the Common Area, together with an administrative fee equal to fifteenten percent (1510%) of all such amounts,
(excluding Real Property Taxes, the costs of Landlord’s Insurance, utilities and security expenses), and shall include, without
limitation, the costs of
(i) gardening;
(ii) landscaping;
(iii) repaving; resurfacing; restriping;
(vi) security;
(v) all costs incurred by Landlord pursuant to Section 8.5 (whether Landlord reimburses said costs or directly
incurs such costs); [Note: These are costs incurred by Landlord under the project CC&Rs for maintenance of the Shopping
Center.]
(vi) the allocated costs of the property managers’ expenses and salaries;
(vii) repairs, maintenance and replacements of bumpers, directional signs and other markers;
(viii) painting;
(ix) lighting and other utilities for the Common Areas;
(x) cleaning;
(xi) seasonal and holiday decorations;
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(xii) Common Area trash removal; Tenant’s trash removal (if contracted by the Shopping Center);
(xiii) intentionally deleted;depreciation and replacement of equipment;
(xiv) the costs of management of the Shopping Center (whether such management services are provided by
Landlord or a third party contractor); and
(xv) the costs of any insurance maintained by Landlord with respect to the Shopping Center, including, without
limitation, commercial general public liability insurance and all-risk property damage insurance covering the Shopping Center
(including, but not limited to, earthquake, terrorism and/or flood insurance, if purchased by Landlord), and and available at
commercially reasonable rates or required by Landlord’s lender).
5.3 Common Area Expenses shall not include the following items:
(i) the cost of the initial acquisition and/or construction of the Shopping Center;
the cost of any deductibles self-insured retentions relating to the insurance maintained by Landlord pursuant
thereto
(ii) the cost or depreciation of the cost of the construction of the buildings or other improvements in the
Shopping Center;
(iii) the cost of providing or performing improvements within the premises of any other tenants in the Shopping
Center, which exclusively services that tenant(s);
(iv) any reserves for future expenditures which would be incurred subsequent to the then current accounting
period;
(v) interest, payments or any other charges on any financing or re-financing of the Shopping Center or any
ground lease payments;
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(vi) interest or penalties incurred as a result of Landlord’s failure to pay any bill as the same shall become due;
(vii) bad debt loss or rent loss;
(ix) leasing commissions, advertising expenses and other costs incurred in connection with the leasing or re-
leasing of the Shopping Center;
(x) any items for which Landlord receives reimbursement or compensation by insurance, warranty or otherwise,
including, without limitation direct reimbursement by any tenant or occupant for a particular item;
(xi) any expense resulting from the negligence of Landlord or its agents, servants, employees or contractors;
(xii) the cost of any repair to remedy damage caused by or resulting from the negligence of any other tenants in
the Shopping Center, including their agents, servants or employees;
(xiii) any and all costs associated with the operation of the business of the entity which constitutes Landlord, as
distinguished from the costs of operation of the Shopping Center (for example, excluded items shall specifically include but shall
not be limited to formation of the entity, preparation of tax returns and financial statements for the entity and gathering of data
therefor, costs of selling, syndication, financing, mortgaging or hypothecating any of Landlord’s interest in the Shopping Center);
(xiv) any costs related to “Hazardous Materials” (as herein defined) testing or abatement in the Shopping Center;
(xv) salaries and other benefits paid to individuals in the direct employment of Landlord, except to the extent
attributable to personnel at or below the rank of property manager;
(xvi) costs incurred due to violations by Landlord of any of the terms and conditions of any leases in the Shopping
Center;
(xvii) any fines or penalties incurred due to violation by Landlord of any legal requirement;
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(xviii) the cost of any capital expenditures; provided, however, Common Area Expenses shall include the annual
amortization of capital expenditures, which amounts shall be amortized at the Interest Rate over the useful life of the applicable
capital improvement or expenditure;
(xix) costs related to any casualty or condemnation of the Shopping Center; provided, however, Common Area
Expenses shall include commercially reasonable insurance deductibles (as amortized pursuant to subsection (xviii) above);
(xx) costs to correct any construction defect in the Premises or the Shopping Center to the extent covered by the
applicable contractor’s warranty;
(xxi) fees, commissions, attorneys’ fees, auditing fees, brokerage fees or commissions, and other costs incurred in
connection with negotiations or disputes with any current, past, or prospective occupant or tenant of the Shopping Center or in
preparing, negotiating or enforcing leases or lease-related documents such as guarantees, estoppels, subordination and non-
disturbance agreements, termination agreements, amendments, subleases and assignments;
(xxii) increases in insurance costs caused by non-typical activities of any other occupant of the Shopping Center;
(xxiii) management and administrative fees except as expressly provided above;
(xxiv) legal expenses associated with new leases and/or renewals of existing tenants or disputes with tenants or
other occupants of the Shopping Center; and
(xxv) any compensation paid to clerks, attendants, or other persons in commercial concessions (such as snack bar
or restaurant), if any, operated by Landlord.
9.2 Landlord’s Obligations. Subject to the foregoing, Landlord shall, at Landlord’s sole cost and expense (except to the
extent such costs may be part of Common Area Expenses) keep and maintain in good condition and repair (or replace, if necessary)
all aspects of the Shopping Center including but not limited to, the Common Areas, the roof, exterior walls, structural parts and
structural floor of the Premises, the exterior of the Premises (provided, however, Tenant shall maintain the Premises storefront, all
40
doors, signage, plate glass), all sprinkler systems and fire protection services (not exclusively serving the Premises), and, any pipes
and conduits outside the Premises for the furnishing to the Premises of various utilities up to the point at which they exclusively
serve the Premises (except to the extent that the same are the obligation of the appropriate public utility company). ), and any and
all pipes and conduits concealed in the floor whether inside or outside the Premises (except that Tenant shall be responsible for
clearing clogged pipes as a result of normal usage including “snaking” clogged water and sewer lines to the closer location, as it
relates to the Premises, of either (y) where such line meets any other Shopping Center tenant’s water or sewer line or (z) where
such line connects to the main line). Notwithstanding anything to the contrary contained in this Lease, Landlord shall not be liable
to Tenant for failure to make repairs as herein specifically required of Landlord, unless Tenant has previously notified Landlord in
writing of the need for such repairs and Landlord has failed to commence and complete said repairs within the time periods set
forth in Section 13.3 of this Lease. Tenant shall reimburse Landlord for all costs and expenses incurred by Landlord pursuant to
this Section, together with a management and administrative fee of fifteen percent (15%) of the amount thereof, which amounts
Landlord may collect together with and in the same manner as Common Area Expenses. Tenant,Tenant specifically waives the
provisions of California Civil Code Section 1942, if applicable.
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SAMPLE TENANT ORIENTED LIMITATIONS ON REAL PROPERTY TAXES
All Real Property Taxes which may be paid in installments shall be paid by Landlord in the maximum number of
installments permitted by law and not included in Real Property Taxes except in the year in which the assessment is actually paid.
Notwithstanding anything to the contrary set forth in this Lease, Real Property Taxes shall not include the following:
(i) any excess profits taxes, franchise taxes, gift taxes, capital stock taxes, inheritance and succession taxes,
estate taxes, federal and state income taxes, and other taxes to the extent applicable to Landlord’s general or net income (as
opposed to rents or receipts),
(ii) taxes on tenant improvements in any space in the Building or the Project based upon an assessed level in
excess of $ per rentable square foot,
(iii) penalties incurred as a result of Landlord’s negligence, inability or unwillingness to make payments of,
and/or to file any tax or informational returns with respect to, any Real Property Taxes, when due,
(iv) any other taxes or assessments charged or levied against Landlord which are not directly incurred as a result
of the operation of the Building or which are incurred in connection with Project Documents,
(v) any real estate taxes directly payable by Tenant or any other tenant in the Building under the applicable
provisions in their respective leases,
(vi) any special assessments or taxes from any city, county, state or federal government or agency, including, but
not limited to, such items as parking income taxes, metro-rail assessments, etc.,
(vii) any costs or expenses relating to any provisions of any Project Documents, including any initial payments or
costs or ongoing payments or costs made in connection with any child-care facilities, traffic demand management programs,
transportation impact mitigation fees, water and sewage conservation, recycling, housing replacement and linkage fees, special
assessment districts, infrastructure and transportation assessments, art programs, or parking requirements and programs,
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(viii) any items included as Operating Expenses or specifically excluded as Operating Expenses, and
(ix) costs, expenses, taxes or assessments associated with or relating to separate items or categories or
subcategories of Real Property Taxes to the extent such items, categories or subcategories were not part of Real Property Taxes for
the Base Year.
After written request (the “Tax Notice”) by Tenant, at Landlord’s option, either (i) Landlord shall diligently pursue claims
for reductions in the Real Property Taxes of the Building, Project or any part thereof, in which event Landlord shall provide Tenant
with detailed information as to how Landlord will pursue such claims, (ii) Tenant may pursue such claims with Landlord’s
concurrence, in the name of Landlord, or (iii) Tenant may pursue such claims in the name of Landlord without Landlord’s
concurrence. In the event that Landlord does not elect either item (i) or (ii), above, within thirty (30) days of receipt of the Tax
Notice, Tenant shall thereafter have the right to pursue such claims under item (iii), above. If either Landlord agrees to pursue such
claims or concurs in the decision to pursue such claims but elects to have them pursued by Tenant, the cost of such proceedings
shall be paid by Landlord and included in Real Property Taxes in the Lease Year such expenses are paid. If Tenant pursues such
claims without obtaining Landlord’s concurrence and such contest is successful, then the cost of such proceedings, but in no event
more than the cumulative tax savings achieved, shall be included in Operating Expenses in the Lease Year such expenses are paid,
and Landlord shall pay or reimburse to Tenant such cost. Tenant may give a Tax Notice prior to the issuance of the actual tax bill
by the taxing authority or receipt by Tenant of a billing from Landlord for Tenant’s Percentage thereof.
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SAMPLE REAL PROPERTY TAXES
(RETAIL LEASE WITH TENANT REDLINING)
6. TAXES.
6.1 Definition of Real Property Taxes. The term “Real Property Taxes” shall include, without limitation, any general
or special assessment, tax, commercial rental tax, in lieu tax, levy, charge, or similar imposition imposed by any authority,
including any government or any school, agricultural, lighting, drainage or other improvement or special assessment district
(general or special),, or any agency or public body, as against any legal or equitable interest of Landlord in the Premises and/or the
Shopping Center or arising out of Tenant’s occupancy of the Shopping Center by Tenant or any other tenants or Premises or which
are attributable to the Premises or other portions of the Shopping Center, together with the reasonable out-of-pocket costs of
professional consultants and/or counsel to analyze tax bills and prosecute any protests, refunds and appeals for the period covered
during the Lease Term. (after deducting any abatements, refunds or rebates)
6.2 Exclusions. Real Property Taxes shall exclude any assessments used to finance the cost of any improvements
within the Shopping Center, any franchise, corporate, estate, inheritance, succession, capital levy, business or documentary transfer
tax of Landlord, or any income, profits, gross receipts, mortgage lien taxes, tax increment financing or recording fees. Furthermore,
Real Property Taxes shall not include any interest or penalty charges payable by Landlord with respect to any such taxes and shall
reflect any discount available to Landlord by prompt payment of such tax regardless of whether such prompt payment is actually
made. Notwithstanding the foregoing, Tenant shall not be responsible for any taxes or assessments pertaining to Landlord’s
construction of streets, utilities or other improvements relating to or associated with Landlord’s development of the Shopping
Center. If any Real Property Taxes are payable in periodic installments, Tenant shall (i) pay only those installments that are
attributable to the Term, and (ii) be responsible to pay Landlord only for those periodic installments which would have been owed
had Landlord elected the maximum time period permitted for payout of the installments. Tenant’s liability with respect to such
taxes and assessments shall be prorated on the basis of a 365-day year to account for any fractional portion of a fiscal tax year
included in the Lease Term at its commencement or expiration (or sooner termination).
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6.3 Change of Ownership. Tenant shall not be responsible for the increase in Tenant’s Pro Rata Share of Real Property
Taxes caused by a sale or other transfer by Landlord which constitutes a “change in ownership” under California Revenue and Tax
Code Sections 60-62 (or subsequent replacement statute) (“Change of Ownership Assessment”) more than once every five (5)
years during the Initial Term or more than one (1) increase in Real Property Taxes caused by a Change of Ownership Assessment
during any Option Period (such five (5) year period or Option Period, for purposes of this Section 6.2, shall be defined as “Prop 13
Tax Abeyance Period”) until the then current Prop 13 Tax Abeyance Period has expired. For illustration purposes only and not as
a limitation, if there are increases in Real Property Taxes due to a Change in Ownership Assessment against the Premises occurring
in the second (2nd) and fourth (4th) years of the Initial Term, then the increase in Real Property Taxes due to the Change of
Ownership Assessment against the Premises occurring during the second (2nd) year shall be immediately included in Tenant’s Pro
Rata Share of Real Property Taxes, but the increase in Real Property Taxes due to a Change in Ownership Assessment occurring
during the fourth (4th) year shall not be included in Tenant’s Pro Rata Share of Real Property Taxes until expiration of the then
current Prop 13 Tax Abeyance Period (which shall be five (5) years following the date of the first Change of Ownership
Assessment). Notwithstanding the foregoing or anything to the contrary contained herein, Tenant shall be responsible for any
increase in Real Property Taxes due to statutory adjustments set forth in Section 51 of the Code, at a rate not to exceed two percent
(2%) per annum, or such greater amount per the Code, if amended. In addition, at the commencement of any Option Period (if
applicable), Real Property Taxes shall be adjusted to equal the actual Real Property Taxes without regard to any limitation in Real
Property Taxes pursuant to this Section 6.2. The foregoing Prop 13 protection shall end in the event of any damage or destruction
of the Shopping Center under Article 14 of this Lease.
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