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The Tenant’s Playbook for Base Year Leases

A Base Year Lease is a commercial lease where the landlord covers the building’s operating expenses and real estate taxes for either a portion or the entirety of the first year, which largely depends on when the lease is signed (the “Base Year”). After that, a tenant is responsible for paying their proportionate share of any increases over the defined base year. The base year balances the risk between landlord and tenant by shielding the tenant at move-in, but the tenant shares the rising costs over the duration of the lease.


In short:

  • Portion or Entirety of Year 1: Landlord pays operating costs and taxes.

  • Remaining Years: Tenant pays only the increase above the Base Year for operating and tax costs.

A quick example

You lease 10,000 SF in a 100,000 SF building — that’s 10% of the total.


Your Base Year operating expenses and taxes are $16.00/SF, which sets the benchmark.


In Year 2, costs stay flat at $16.00/SF, so you owe nothing extra.


By Year 3, expenses rise to $17.20/SF, or $1.20/SF above your Base Year. You pay your 10%

share of that increase:$1.20 × 10,000 SF = $12,000 per year (or $1,000/month).


You only pay for increases above your Base Year — never for the Base Year itself.


What’s included in “Operating Costs”?

Operating expenses are made up of typical day-day costs to run the property. Typical, day‑to‑day costs to run the property, including but not limited to:

  • Utilities: electricity, heat, water, sewer.

  • Maintenance & repairs: janitorial, HVAC service, landscaping, snow removal.

  • Insurance premiums: property and liability.

  • Management fees & on‑site staff.


How the Base Year and billing work

  • Base Year set‑up: One thing for tenants to keep in mind is the base year for taxes is based on a fiscal year July 1-June 30, while operating expenses are usually based on a calendar year. Landlord totals eligible operating costs and real estate taxes over a defined 12‑month period.

  • After the Base Year Has Completed: If future years exceed the Base Year, a tenant will owe their proportionate share of the difference. Although, if costs are lower than the base year then the tenant would owe nothing.

  • Monthly estimates + annual true‑up: In a typical commercial lease, the tenant is asked to pay 1/12 of the estimated share each month. At the end of the year, there is a true-up where the landlord will compare the budgeted estimated amount for the previous year and compare that to the actual amount and at that time a tenant will receive either a credit or a bill at reconciliation. Commonly, these costs would be due within 10-30 days, depending on the language within the lease.


What happens in practice

  • Gross‑ups: Expenses should be normalized to 95% occupancy.

  • Capital cost amortization: Allowed when projects reduce operating costs.

  • Carveouts: Volatile items (e.g., snow removal) may be averaged across several years.


Why tenants like Base Year

  • Aligned incentives: If the landlord controls costs—or secures a tax abatement—your pass‑throughs drop.

  • Transparency: A clear baseline makes audits easier.

  • Comparability: Easier to benchmark buildings by Base Year and current levels.


Watch‑outs

  • Timing mismatches: Taxes on a fiscal year and operating expenses on a calendar year.

  • “Loaded” Base Years: One‑time spikes (storms, major repairs) can distort the baseline.

  • Loose definitions: Vague or overly broad clauses give the landlord wide discretion to include costs that are not related to day-to-day operation of the property.

  • Reconciliation shocks: Big year‑end true‑ups can strain cash flow.


Tenant‑friendly negotiation tips

  • Demand detail: Get a line‑item breakdown; exclude one‑time anomalies and costs tied to other tenants.

  • Cap controllables: Limits how much the landlord can pass through to tenants for controllable operating expenses. e.g., 5%, non‑cumulative, annually.

  • Standardize gross‑ups: Apply the same 95% to both Base and comparison years.

  • Tighten true‑ups: Require clear backup (invoices/tax bills), audit rights, prompt credits, and reasonable payment windows.

Navigating a Base Year Lease doesn’t have to feel complicated. With a clear understanding of how operating expenses are defined, how controllable costs are capped, and what truly belongs in your pass-throughs, tenants can turn this lease structure into an advantage rather than a risk. The key is negotiating transparency upfront — ensuring the Base Year is fair, definitions are tight, and annual reconciliations are supported with proper documentation. When structured thoughtfully, a Base Year Lease provides predictable occupancy costs, aligns incentives between tenant and landlord, and helps growing companies plan with confidence.

 

At Webster Realty Advisors, we work exclusively on behalf of tenants, helping them interpret the fine print, identify savings opportunities, and secure terms that reflect today’s market realities — not yesterday’s assumptions.

 
 
 

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