# United States: GSA Leasing: How to Recoup Operating Cost Escalations

Last Updated: November 30 2016
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GSA leases include operating costs (for example, the cost of cleaning services, supplies, materials, maintenance, trash removal, landscaping, water, sewer charges, heating, electricity, and certain administrative expenses attributable to occupancy) that will rise year after year. The key question for leaseholders is how to position yourself to recoup those cost increases beginning with the second year of the lease and for each year thereafter.

The typical GSA lease includes a clause that determines whether the rental rate remains firm throughout the term of the lease, or if the rent is subject to an annual re-adjustment of operating costs. The amount of adjustment is determined by multiplying the operating costs in the base year by the percent of change in the Consumer Price Index in the anniversary year (e.g., the second, third, fourth year). The costs listed on GSA Form 1217 (Lessor's Annual Cost Statement) are used to set the base rate for the operating costs adjustment. The 1217 is negotiated and agreed upon by GSA and the lessor at the beginning of the lease. The Consumer Price Index is measured by the Department of Labor and published by the Bureau of Labor Statistics.

The lease clause should include a simple mathematical formula. You multiply the operating cost base by the percentage change in the published Consumer Price Index between the base and anniversary years to determine the precise amount due for each year. For example, let's assume the first year of a lease with a ten-year term began on January 1, 2015. No operating cost increases are paid in the first year 2015. According to the Form 1217, the operating cost base is \$1,000,000. To calculate the amount of operating cost escalations GSA is required to pay in the second year (i.e., the first anniversary) requires a two-step process.

First, calculate the difference between the Consumer Price Index in the base year and the anniversary year:

Base CPI January 2015 233.707

Anniversary CPI January 2016 236.916

The difference between 233.707 and 236.916 is 3.209 or about a 1.4% increase (0.013730868 to be precise).

Second, plug the numbers into the operating cost escalation formula as follows:

Base Operating Cost Per Lease \$1,000,000.00

% Increase in CPI x 0.013730868

Annual Increase in Operating Costs \$ 13,730.87

This amount is relatively small in the first anniversary year. However, it will likely be much larger by the tenth (and final) year of the lease term. Typically, operating cost escalations are divided by twelve and made part of the monthly rent payments.

While the calculation is relatively straightforward, lessors need to be vigilant because GSA often tracks the operating cost escalations in terms of year over year increases – not base year versus anniversary year outlined above. In those instances, GSA runs the operating cost escalation calculation per the operating cost escalation clause in the lease, but then GSA deducts what it paid for cost escalations the previous year. There is no regulation or published guidance (such as the GSA Leasing Desk Guide) to support this methodology. Presumably, GSA does this to make it easier to identify the amount that the rent will increase from the last year. The risk for lessors is that GSA's methodology differs from the plain language of the lease. If the landlord signs a modification incorporating GSA's faulty math, it could change the terms of the lease and affect your rights – and, more importantly, the amount of rent to which you are entitled in the future.

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