What is an operating expense pass through or escalation?
Expense pass through or escalations are building operating costs the tenant must pay in addition to monthly rent because they exceed a “base year” operating expense factor. Typically, when a rental rate is determined, it will include a component that represents the operating expenses during that base year. In subsequent years following the base year, if operating expenses exceed the base year operating expense factor used in determining the rent, the tenant pays a proportionate share of such increase. These expenses are typically invoiced monthly, based on an estimate of operating expenses for the year, and reconciled during the following year after the actual operating expenses for the year in question are known. This practice was developed in an effort to protect the landlord from inflation, since the landlord was fixing a rental rate over a long period of time and could not guarantee that operating expenses would not go up due to inflation or other operating issues. A well-negotiate
