Rent & Operating Costs
Base year
Also called: expense stop, base year stop
A base year is the calendar year whose operating expenses are built into a tenant's base rent, so the tenant pays only its share of increases above that year's costs. It is the standard operating expense structure in full service office leases, where a triple net structure is uncommon.
In a base year lease, the tenant's rent already covers the building's operating costs at the base year level. Starting in year two, the tenant pays its pro rata share of the amount by which costs exceed the base year figure.
Why the base year selection matters so much
A base year set artificially low guarantees the tenant pays escalations from day one. Two common ways this happens:
- A partial year base. If the lease commences in September and the base year is that same calendar year, the base captures only four months of costs. Insist the base year be the first full calendar year of the term.
- An abnormally low base. A building that was 55 percent occupied during the base year had genuinely lower variable costs. When it fills up, the tenant pays for the increase even though its own usage did not change. This is exactly the problem a gross-up provision is meant to solve, and it is why tenants should insist on gross up language rather than treating it as a landlord favorable term.
Tax base years are often separate
Many office leases set one base year for operating expenses and a separate one for real estate taxes, because a property reassessment on sale can spike taxes independently. A tenant that negotiated a good expense base year and ignored the tax base year has done half the job. Watch for a landlord redline that deletes a provision excluding increases attributable to a change of ownership reassessment, which in some states is the single largest expense change a tenant will see during a term.
Base year and renewals
Renewal options frequently reset the base year to the first year of the renewal term. That is normal and generally fair. What is not normal is a renewal clause that keeps the original base year while the rent moves to market, which charges the tenant escalations accumulated over the entire prior term on top of a market rent that already reflects them.
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Analyze your first round freeRelated terms
A gross-up provision adjusts a building's variable operating expenses to what they would have been at a stated occupancy level, commonly 95 percent, before the tenant's share is calculated.
An operating expense cap limits how much a tenant's share of operating costs can rise year over year, typically stated as a percentage such as 5 percent.
CAM charges are the tenant's proportionate share of the cost of operating and maintaining a property's shared areas, billed monthly as an estimate and trued up against actual spend after the year closes.
An option to renew gives a tenant the unilateral right to extend the lease for a stated additional term, exercisable by notice within a defined window.
This page is general information, not legal advice. Review lease language with qualified counsel.