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, depending 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. This arrangement balances the risk between landlord and tenant by shielding the tenant at move-in, while allowing them to share the rising costs over the lease duration.

Understanding Base Year Leases

Key Features of Base Year Leases

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

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

  
  

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A Quick Example

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

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

In Year 2, costs remain 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 consist of typical day-to-day costs to run the property. These include, but are not limited to:

• Utilities: Electricity, heat, water, sewer.

• Maintenance & Repairs: Janitorial services, HVAC service, landscaping, and snow removal.

• Insurance Premiums: Property and liability insurance.

• Management Fees & On-Site Staff.

  
  

How the Base Year and Billing Work

Base Year Set-Up

One important detail for tenants to remember is that the base year for taxes is based on a fiscal year (July 1-June 30), while operating expenses usually follow a calendar year. The 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. However, 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 compares the budgeted estimated amount for the previous year to the actual amount. 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 lease language.

What Happens in Practice

Gross-Ups

Expenses should be normalized to 95% occupancy.

Capital Cost Amortization

This is allowed when projects reduce operating costs.

Carveouts

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

Why Tenants Like Base Year Leases

• 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 can create confusion.

• “Loaded” Base Years: One-time spikes (like storms or 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 the 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: Limit 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.

  
  

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Conclusion: Navigating a Base Year Lease

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.