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Base Year Leases
This is a draft, citing and reference, and POV issues will be rectified soon
The intent and objective of a “Base Year Lease” is to have the
tenant(s) fairly share in the increases of a Building’s/Project’s
operating expenses (i.e., primarily increases of wage rates, utility rates, contract rates, etc.), as experienced by a “fully occupied and fully built-out” Building/Project, in excess of a designated “base” level of expenses for the same “fully occupied and fully built-out” Building/Project, and having the same type and quantity of services as were provided in such “Base Year.” Note that this “concept” is entirely different than that of a “
triple-net” (“NNN”) lease, and landlords and property managers must clearly understand the difference and perform the entirely different escalation computations according to the specific type of lease.
Prior to the late 1970’s and early 1980’s, commercial real estate landlords typically utilized
Full Service Gross leases. Such leases only required the tenants to pay rent to their landlord. They were not required to share in the Building’s/Project’s expenses such as property taxes, insurance, repairs and maintenance, and as a result, landlords were fully absorbing all costs and all cost increases, including those over which they had no control. It was this latter element that created a problem for the landlords. Although portion of the tenants’ “rent” was always assumed to cover the expenses then being incurred by the landlord at the time the lease commenced, significant increases in such expenses were not envisioned, or therefore included in the “rent.” As time passed, and the expenses of the Building/Project increased, the landlord’s profits began to greatly diminish as they had to cover rising maintenance, tax, utility, and insurance costs. The reason and benefits of owning property and leasing it to tenants was being fundamentally challenged. As a result, a “Base Year Concept” was formulated wherein the landlord would assume the cost and financial risk for the operation and maintenance of the Building/Project for the first year (i.e., the “Base Year”), and the tenant would only have to pay for their share of the inflationary increases over and above the Base Year.
[1]
For a particular calendar year’s expense escalations to be computed correctly under the “Base Year Concept”, the following tests are required:
In short, this above-mentioned adjustment process is done simply to maintain equity and fairness for both parties in the “escalation of the Building’s/Project’s expenses” process, as was originally intended when both parties negotiated and executed this particular type of lease document. Additionally, landlords and their property managers are “ethically” required (per their moral and their licensing requirements) to perform such adjustments so that neither party is over-paying for what it contractually agreed to.
When a “Base Year Concept” lease contains a “Gross Up” provision, an even more unique animal results and an even more specific result is explicitly intended by the parties for the operating expense escalation computations. The intended result is that the playing field for escalated expenses is leveled and will only vary from year to year as a result of increases and decreases in wage rates, utility rates, contract rates, etc., and not tenant occupancy levels of the Building/Project.
According to such leases, in order for each calendar year’s expense escalations to be correctly computed, the correct implementation of the specified “Gross Up” factor is required. For example, if a particular lease has a “Gross Up Percentage” of 100% and if the Building’s/Project’s actual average occupancy for any particular calendar year was less than that stated “Gross Up Percentage”, then the certain categories of operating expenses that are affected by changes in occupancy must be “adjusted” by the “Gross Up Factor” in each such year’s escalations to reflect costs as if the Building’s/Project’s occupancy had been at the stipulated level. This, of course, gives the tenant an escalation cost “base” of a “fully built-out and occupied” Building/Project and shields it from large increases in operating expenses due to increases in Building/Project occupancy, yet at the same time ensures that the tenant and the landlord are each paying their agreed-to fair share of the Building’s/Project’s overall “consistently computed” expense increases.
While there are various acceptable ways to perform “Gross Up” computations and various expense categories may have their own entirely different methodologies, there are some fundamental requirements that all “Gross Up” computations must adhere to:
Fundamental to the overall “Expense Escalation Concept” is the inclusion of allowable/escalatable expenses in a tenant’s escalation billing and also the exclusion of all non-escalatable expenses:
![]() | This is not a Wikipedia article: It is an individual user's work-in-progress page, and may be incomplete and/or unreliable. For guidance on developing this draft, see
Wikipedia:So you made a userspace draft. Find sources:
Google (
books ·
news ·
scholar ·
free images ·
WP refs) ·
FENS ·
JSTOR ·
TWL |
Base Year Leases
This is a draft, citing and reference, and POV issues will be rectified soon
The intent and objective of a “Base Year Lease” is to have the
tenant(s) fairly share in the increases of a Building’s/Project’s
operating expenses (i.e., primarily increases of wage rates, utility rates, contract rates, etc.), as experienced by a “fully occupied and fully built-out” Building/Project, in excess of a designated “base” level of expenses for the same “fully occupied and fully built-out” Building/Project, and having the same type and quantity of services as were provided in such “Base Year.” Note that this “concept” is entirely different than that of a “
triple-net” (“NNN”) lease, and landlords and property managers must clearly understand the difference and perform the entirely different escalation computations according to the specific type of lease.
Prior to the late 1970’s and early 1980’s, commercial real estate landlords typically utilized
Full Service Gross leases. Such leases only required the tenants to pay rent to their landlord. They were not required to share in the Building’s/Project’s expenses such as property taxes, insurance, repairs and maintenance, and as a result, landlords were fully absorbing all costs and all cost increases, including those over which they had no control. It was this latter element that created a problem for the landlords. Although portion of the tenants’ “rent” was always assumed to cover the expenses then being incurred by the landlord at the time the lease commenced, significant increases in such expenses were not envisioned, or therefore included in the “rent.” As time passed, and the expenses of the Building/Project increased, the landlord’s profits began to greatly diminish as they had to cover rising maintenance, tax, utility, and insurance costs. The reason and benefits of owning property and leasing it to tenants was being fundamentally challenged. As a result, a “Base Year Concept” was formulated wherein the landlord would assume the cost and financial risk for the operation and maintenance of the Building/Project for the first year (i.e., the “Base Year”), and the tenant would only have to pay for their share of the inflationary increases over and above the Base Year.
[1]
For a particular calendar year’s expense escalations to be computed correctly under the “Base Year Concept”, the following tests are required:
In short, this above-mentioned adjustment process is done simply to maintain equity and fairness for both parties in the “escalation of the Building’s/Project’s expenses” process, as was originally intended when both parties negotiated and executed this particular type of lease document. Additionally, landlords and their property managers are “ethically” required (per their moral and their licensing requirements) to perform such adjustments so that neither party is over-paying for what it contractually agreed to.
When a “Base Year Concept” lease contains a “Gross Up” provision, an even more unique animal results and an even more specific result is explicitly intended by the parties for the operating expense escalation computations. The intended result is that the playing field for escalated expenses is leveled and will only vary from year to year as a result of increases and decreases in wage rates, utility rates, contract rates, etc., and not tenant occupancy levels of the Building/Project.
According to such leases, in order for each calendar year’s expense escalations to be correctly computed, the correct implementation of the specified “Gross Up” factor is required. For example, if a particular lease has a “Gross Up Percentage” of 100% and if the Building’s/Project’s actual average occupancy for any particular calendar year was less than that stated “Gross Up Percentage”, then the certain categories of operating expenses that are affected by changes in occupancy must be “adjusted” by the “Gross Up Factor” in each such year’s escalations to reflect costs as if the Building’s/Project’s occupancy had been at the stipulated level. This, of course, gives the tenant an escalation cost “base” of a “fully built-out and occupied” Building/Project and shields it from large increases in operating expenses due to increases in Building/Project occupancy, yet at the same time ensures that the tenant and the landlord are each paying their agreed-to fair share of the Building’s/Project’s overall “consistently computed” expense increases.
While there are various acceptable ways to perform “Gross Up” computations and various expense categories may have their own entirely different methodologies, there are some fundamental requirements that all “Gross Up” computations must adhere to:
Fundamental to the overall “Expense Escalation Concept” is the inclusion of allowable/escalatable expenses in a tenant’s escalation billing and also the exclusion of all non-escalatable expenses: