WHAT IS A BASE YEAR? | WHAT IS AN EXPENSE STOP?
A Base Year is a clause found in many Full-Service and Gross Leases. It is not found in NNN leases. The Base Year is a year that is tied to the actual amount of expenses for property taxes, insurance and operating expenses (sometimes called CAM) to run the property in a specified year. In a new lease, the Base Year is most often the year the lease is executed or the year in which the lease commences.
The actual amount of expenses that are tied to the Base Year (property taxes, insurance and operating expenses) becomes the baseline or ‘floor’. As the lease advances in years, the tenant is responsible for paying any increase above the Base Year amount.
For example, if a lease commenced in 2015, and the total rent was $30 per SF, with $10 per SF being the property taxes, insurance and operating expenses for the property, the Base Year would be 2015 and the Base Year amount would be $10 per SF.
If in 2016 the property taxes, insurance and operating expenses did not change or even went down, the tenant would not owe any additional payment. However, if in 2017, the property taxes, insurance or operating expenses increased to $10.25 per SF, the tenant would then be responsible for a one-time payment of $0.25 per SF ($10.25 minus the $10 per SF Base Year amount).
Once the landlord establishes that there will most likely be an increase above the Base Year amount in future years, many landlords will divide the anticipated or prior increase into an monthly amount and ask the tenant to pay it on a monthly basis with their regularly scheduled monthly rent check. This approach is also preferred by many tenants, as it prevents the tenant from getting surprised by an isolated bill or getting charged a one-time expense they were not planning for. Paying the increase in the Base Year on a monthly basis can help the tenant maintain a better budget.
Another term that is often used alongside or similar to Base Year, is Expense Stop. Essentially, the Base Year Amount is synonymous with the Expense Stop amount, which is the actual amount of money that comprises the property taxes, insurance and operating expenses. Just like the Base Year amount, the tenant is responsible to pay any increase in those expenses above the Expense Stop amount.