Expense Stop

An expense stop is a fixed dollar figure — usually expressed per rentable square foot — representing the operating expenses already covered by base rent. The tenant pays its share of expenses only above that level.

How it differs from a base year

A base year sets the reference to whatever expenses actually turn out to be in a stated year. The figure is unknown at signing and only settles once that year closes.

An expense stop fixes the reference as a negotiated number up front. If the stop is $9.50 per square foot and actual expenses reach $11.20, the tenant pays its share of the $1.70 difference.

Why landlords and tenants prefer different ones

An expense stop is easier for both parties to underwrite because the number is known at signing. A tenant can model its exposure precisely; a landlord knows exactly what it has absorbed into base rent.

A base year shifts risk toward whichever party guessed wrong about that specific year. An unusually mild winter or a year of deferred maintenance produces a low base, which benefits the landlord for the entire term.

Expense stops are more common in modified gross leases and in markets where operating expenses are relatively predictable.

Setting the stop

A stop set below actual current expenses means the tenant pays from day one, which is effectively additional rent presented as a recovery. A stop set well above current expenses means the landlord absorbs increases for several years.

Neither is wrong, but the stop and the base rate have to be evaluated together. A low headline rate with a low stop can easily cost more than a higher rate with a realistic one — which is why total occupancy cost is the number worth comparing.

Model the all-in figure with the NNN occupancy cost calculator.