Base Year
The reference year against which future operating expense increases are measured. Tenant pays only the increase above base year expenses, making it critical to the economic deal.
Model Lease Language Variations
“The Base Year shall be calendar year 2026. Base Year Operating Expenses shall be actual Operating Expenses incurred by Landlord in the Base Year, without adjustment for occupancy. If a new assessment, utility rate increase, or other cost increase takes effect after the Base Year, the Base Year amount shall not be adjusted to reflect such increase.”
No gross-up for vacancy in base year. If building is 70% occupied, base year expenses are artificially low, giving tenant immediate exposure to escalations.
“The Base Year shall be calendar year 2026. Base Year Operating Expenses shall be the actual Operating Expenses for the Base Year, provided that if the Building is less than ninety-five percent (95%) occupied during the Base Year, those Operating Expenses that vary with occupancy shall be adjusted to reflect the amount that would have been incurred at ninety-five percent (95%) occupancy.”
Standard gross-up of base year variable expenses. Fixed costs stay at actuals. Prevents artificially low base year from vacancy.
“The Base Year shall be the twelve-month period commencing on the Rent Commencement Date. Base Year Operating Expenses shall be adjusted to reflect (i) ninety-five percent (95%) occupancy for variable expenses, (ii) a full twelve months of real estate taxes based on a fully assessed and completed building, and (iii) exclusion of any non-recurring expenses, capital expenditures, or one-time charges.”
Tenant-aligned base year starting from their occupancy date, grossed up with tax normalization and non-recurring expense exclusions. Maximizes the base year amount.
Calculation Methodology
1. Compile actual Operating Expenses for the base year. 2. Identify variable vs. fixed expenses. 3. If building occupancy < 95%, gross up variable expenses: divide by actual occupancy rate, cap at 95%. 4. Normalize property taxes for full assessment if building is newly assessed. 5. Exclude non-recurring charges (if lease requires). 6. The resulting amount is the Base Year Operating Expenses. 7. In subsequent years, tenant pays their pro rata share of expenses above this amount.
Common Drafting Errors
Not specifying whether the base year is a calendar year or the first 12 months of the lease term — creates confusion when lease starts mid-year
Omitting gross-up language for the base year — in a partially occupied building, this dramatically reduces the base year amount
Failing to normalize property taxes when the building received a new assessment during the base year
Not addressing what happens if the base year includes non-recurring expenses like a one-time repair or legal settlement
Relevant Case Law
Dispute over whether base year should include one-time lobby renovation expense. Court held the renovation was a capital improvement excluded from operating expenses under the lease, reducing the base year and increasing tenant's ongoing exposure.
Billing System Implications (Yardi / MRI)
In Yardi, the base year is established in the lease abstract and referenced by recovery pools. Common error: entering the base year amount manually instead of linking to actual year-1 expenses — causes the base year to become stale if retroactive adjustments are made. In MRI, base year settings are in the Recovery Analysis module; ensure the base year gross-up calculation matches the lease and that tax normalization is applied if required.
CapVeri Analysis
The base year is arguably the most economically significant provision in a full-service lease. A $1.00/SF error in the base year compounds every year of the lease term across every tenant. CapVeri flags base year anomalies including missing gross-up adjustments and tax normalization gaps.
Related Resources
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