Where Occupancy Cost Risk Really Begins

By the time you are reviewing reconciliations, the outcome has already been decided.

8 min read  •  Part 1 of 3

I have said this before, and it is a principle I come back to often. It captures something essential about what we do in lease administration. The wins are not always visible. They show up in the overcharges that never made it to an invoice, the cost escalations that were caught before they compounded, and the lease language that held up when it was tested.

CAM and operating expense reconciliation season is when lease administrators tend to feel some pressure. Reconciliations come in. The math and logic need to be validated. Questions and back-and-forth communication start stacking up. But here is the truth: by the time you are reviewing reconciliations, much of the outcome has already been decided. Occupancy costs do not start with the reconciliation. They start with how the lease was negotiated.

This is the first post in a three-part series exploring how to proactively manage occupancy costs across the lease lifecycle. We are starting where the risk starts: in the lease language itself.

Where Risk Lives in the Lease

Many occupancy cost issues can be traced back to lease language. On the surface, the language may appear reasonable, but in practice, it can shift costs in ways that are difficult to untangle and even harder to dispute. These items are often subtle during negotiations, but they can have a significant financial impact over time.

I want to focus on four areas that I see create the most risk.

Capital Expenditure Treatment

One commonly overlooked gap is how capex is handled within operating expenses. Many leases exclude capital improvements, but then carve out exceptions allowing those costs to be passed through if they are expected to reduce operating expenses, often without clearly defining how that reduction is measured.

This can open the door to large projects like roof replacements, HVAC upgrades, or energy efficiency initiatives being passed through over time. What is often missing is how those costs are amortized, a clear definition of what constitutes a capital improvement, and whether interest charges are included in the amortization. Each of those gaps can add meaningful cost over the life of a lease.

Controllable vs. Non-Controllable Expenses

Leases may include caps on controllable expenses, but if the lease does not clearly specify what falls into that category, there is flexibility in how costs are classified. Expenses like security, landscaping, janitorial, administrative costs, or certain maintenance programs can fall into gray areas.

Over time, those gray areas tend to get resolved in one direction: more costs get categorized outside the capped bucket. The cap still exists in the lease, but it may not apply to a meaningful portion of total expenses. The protection it was intended to provide gets quietly reduced, and occupancy costs end up higher than expected.

Gross-Up Methodology

Gross-up provisions are frequently included but not adequately defined. A lease may allow expenses to be grossed up to a certain occupancy level, but fail to define which expenses are eligible, what occupancy percentage is used, or how the calculation is performed. This can result in tenants paying for expenses that were not actually incurred or paying at levels that do not reflect the building’s true operating conditions.

There is also a risk of double computation, which I covered in a previous post called “CAM Audits – Management Fees” in a section titled “The Gross-Up Trap.” If you have not read it, I would recommend going back to that one.

New and Evolving Cost Categories

This is one that is growing in importance. As buildings modernize, new expenses are being introduced: technology fees, sustainability initiatives, smart building systems, compliance-related costs. This can include items like building analytics platforms, energy management systems, ESG reporting costs, EV charging infrastructure, and new regulatory requirements.

Without clear guidance in the lease, these costs can be introduced into reconciliations with limited visibility and little ability to validate or challenge them.

This is especially critical in base year leases. When new categories are introduced after lease commencement, they can bypass the original base-year structure and create incremental costs that were never contemplated. If the lease does not clearly address how new expense categories are treated, the result is often a steady expansion of recoverable costs over time.

And That Is Not the Full List

Beyond these four, there are additional areas that create risk: management and administrative fee structures that get applied to inflated expense bases, utility and shared service allocations that lack clear methodology (especially in mixed-use environments), audit rights that exist on paper but are not practical to exercise, and timing requirements that limit your ability to review and respond. Each of these deserves its own focused discussion, and I will be touching on several of them in future posts.

The point for now is this: each of these issues may seem small during negotiations. But over time, they compound. And by the time they surface in a reconciliation, the ability to address them is significantly limited.

The Work That Prevents the Problem

This brings me back to where I started. The most impactful lease administration work often happens before a reconciliation ever arrives. It happens when someone reviews the lease language with an operational lens, identifies where the gaps are, and flags them before the deal closes.

That is the kind of work that does not always get measured, because the outcome is what did not happen. But it is where some of the greatest value in lease administration lives.