How does a base year work?
The lease names a base year, usually the first full calendar year of the term. The landlord records the building's actual operating expenses for that year. In each later year, the tenant pays its pro-rata share of any amount by which actual expenses exceed the base-year amount. If expenses fall below the base year, the tenant usually pays nothing extra, and most leases do not give a credit.
Because a partly empty building has lower variable costs, many leases also apply a gross-up so the base year is not artificially low. Leases often list exclusions, such as capital repairs or leasing commissions, that never count toward the comparison.
See also: CAM reconciliation and Commercial lease administration.
What does a base-year calculation look like?
Example (illustrative figures). A tenant leases 10% of a building. Base-year operating expenses were $1,000,000. This year they are $1,080,000, an increase of $80,000. The tenant's share of the increase is 10% × $80,000 = $8,000 for the year, usually billed as monthly estimates of about $667 and trued up after year-end.
If next year expenses drop to $990,000, the tenant owes no increase that year under a typical base-year clause.
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