Glossary / Lease terms and deal stages
Also known as: Base-year stop
A base year is the year whose actual operating expenses and taxes set the landlord's share of building costs in an office lease. The tenant then pays its pro rata share of increases above that base year amount in later years of the term.
The SIOR lease glossary defines base year as "actual taxes and operating expenses for a specified base year, most often the year in which the lease commences." A.CRE adds that the base year is usually either the calendar year in which the lease is signed or the following year.
According to Colliers, "the tenant will be required to pay its pro-rata share of operating expenses in excess of the operating expenses for the base year." Base years are common in full service gross leases. An Expense stop works the same way but uses a fixed dollar figure instead of actual costs.
A base year changes the tenant's total occupancy cost, not the scheduled Base rent. Whether those later pass-through charges are part of your commission base depends on your commission agreement. One Grubb & Ellis commission agreement explicitly excluded adjustments to base rent made to cover increases in operating expenses over the base year amount.
Because the base year sets how much of future cost growth the tenant absorbs, it can also be a point of negotiation that affects how quickly a deal reaches signing.
Treat base year pass-throughs as tenant cost, not commission, unless your agreement says otherwise.
For example, a hypothetical tenant with a 10% pro rata share has a base year with $1,000,000 in building operating expenses. If expenses reach $1,100,000 in year 3, the increase is $100,000 and the tenant owes 10% of it, or $10,000, as additional rent that year.
