Operating Expense Escalations Explained

In the early part of every year, tenants in many commercial buildings will get their "operating expense escalation" bills.  In the past, this was a very predictable 2-3% over the previous year, but today, with rising utility costs and insurance, operating escalations are anything but predictable. Tenants need to know what constitutes their operating expenses and how they can minimize the impact on their rent and occupancy costs.

Simply put, operating expenses are the total cost of all the goods and services needed to keep a commercial property running.  Among them are the costs for utilities, heating, air conditioning, water, trash removal, landscaping, snow removal, janitorial expenses, security, insurance, accounting, management fees, repairs and maintenance or other costs associated directly with the operation of the property.  Real Estate taxes are generally calculated separately, but methods for "passing through" escalations are similar.