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It's All about the Base

by Lynn Blakeley

Traditionally, most leases for commercial office space are "gross leases" (Go here for an explanation of different lease types). This is supposed to mean that you pay your rent every month and you're done: any expenses relating to operating and maintaining the building are your landlord's problem. (That's why you rent in the first place, right?)

In the good old days, it may have actually worked this way but long ago, landlords began looking for a way to recoup unexpected expense increases and the concept of the "base year" was introduced.

Under a gross lease with a "base year" provision (which is almost all of them) a year is stated in the lease as the base.  The amount of operating expenses incurred in this year then becomes the upper limit of what the Landlord is required to pay.  If expenses rise above this amount in future years, the tenant is required to pay her proportional share of the increase.  (If expenses should happen to fall, the landlord pockets the difference).

Here's a simple example: Suppose the base year in the lease is 2014 and the building expenses for that year are $1,000,000. In 2015, the expenses go up $20,000 for a total of $1,020,000.  If the tenant occupies 10% of the building, she will be required to pay 10% of the overage or $2,000.

As a tenant negotiating a new lease (hopefully with competent professional help) there are some steps you can take to improve your situation.  Although it may seem obvious, the first is to make sure that the base year stated in the lease is correct: i.e., the year you are signing the lease.  In some cases, it may also be possible to negotiate a percentage cap in increases.

At renewal time, your landlord will likely push for a rate increase. Presumably, part of the rationale for this increase is a corresponding increase in building expenses so it makes perfect sense at this point to negotiate a new base year.  Otherwise, you are effectively paying twice for any increase in expenses.

Questions about Office Leasing?

In the posts below we address many of the issues that routinely come up in office leasing. Check out the posts or just give us a call to discuss your specific concerns: 210.349.6111.

How Tenant Rep Brokers Get Paid

Rentable Square Feet and the Common Area Factor

Types of Commercial Leases

The ABC's of Building Class

How much Office Space Do You Need?

Lynn Blakeley represents tenants in office lease transactions. Call Lynn at:

210.349.6111.