Operating Expense Exclusions
The negative definition of costs specifically carved out from operating expenses, protecting tenants from bearing landlord-specific costs, capital items, and above-market charges.
Model Lease Language Variations
“Operating Expenses shall not include: (i) costs of capital improvements (except as provided in Section X), (ii) leasing commissions, (iii) interest and amortization on mortgages, and (iv) depreciation of the Building.”
Short exclusion list covering only obvious non-recoverable items. Many tenant-unfriendly costs (legal fees, executive salaries, above-market management fees) are not excluded.
“Operating Expenses shall not include: (i) capital expenditures (except amortization per Section X), (ii) leasing costs and commissions, (iii) mortgage interest and principal, (iv) depreciation, (v) Landlord's income taxes, (vi) costs of Landlord's disputes with other tenants, (vii) costs of correcting defects in original construction, (viii) executive salaries above on-site property manager level, (ix) above-market fees to Landlord affiliates, and (x) costs reimbursed by insurance or third parties.”
Comprehensive exclusion list covering the most common improperly included items. Market-standard for Class A office leases.
“In addition to the exclusions set forth above, Operating Expenses shall not include: (a) any expense arising from Landlord's negligence or willful misconduct; (b) fines, penalties, or interest for late payment of any expense; (c) charitable contributions; (d) art purchases or rentals; (e) political contributions or lobbying costs; (f) costs of environmental remediation; (g) costs of ADA compliance for the base building; (h) any cost that would not be incurred by a prudent owner of a comparable building; and (i) reserves for future expenses.”
Exhaustive exclusion list with prudent-owner standard. Captures edge cases frequently found in audits (art, donations, reserves, environmental). Gold-standard tenant protection.
Calculation Methodology
1. After applying the inclusion test, review each included expense against the exclusion list. 2. Remove any expense that matches an exclusion category. 3. For gray-area items, apply the reasonableness or prudent-owner standard if applicable. 4. For insurance or third-party reimbursed costs, net the reimbursement against the gross expense before allocating. 5. Document the exclusion analysis for audit support.
Common Drafting Errors
Using a non-exhaustive exclusion list while the inclusion list says 'all costs without limitation' — the inclusion language swallows the exclusion carve-outs
Not excluding above-market fees to landlord affiliates — allows self-dealing in management, insurance brokerage, and construction management
Failing to exclude reserves — landlord bills for future expenses not yet incurred, inflating current-year CAM
Not addressing environmental remediation — a single cleanup event could dwarf annual operating expenses
Relevant Case Law
Landlord included $340K in environmental testing and remediation in CAM charges. Tenant's lease excluded 'costs arising from hazardous materials on the property.' Court ordered full refund plus interest.
Billing System Implications (Yardi / MRI)
In Yardi, exclusions are typically managed by not assigning the relevant GL codes to recovery pools. Common error: assigning a GL code that should be excluded (e.g., legal fees, corporate overhead) to a recovery pool by mistake. In MRI, exclusions are managed through charge code mapping — run a periodic reconciliation of charge codes vs. lease exclusion lists to catch mapping errors.
CapVeri Analysis
A strong exclusion list is the tenant's primary protection against overbilling. The most frequently violated exclusions are: above-market affiliate fees, reserves, and costs that should be capitalized. CapVeri's lease compliance engine checks each expense line against the exclusion list from the lease abstract.
Related Resources
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