I'm excited to be back for this week's edition of frequently asked questions for commercial real estate. In today's blog post, I want to discuss a commonly used term in commercial real estate leasing - the "base year."
What is a Base Year?
A base year is a crucial concept in commercial real estate lease agreements. It essentially sets the precedent for future increases in operating expenses and determines who will be responsible for covering those increases.
Types of Leases
Base years are commonly found in two types of leases:
Full-Service Gross Leases: In these leases, the landlord covers all operating expenses.
Modified Gross Leases: These leases involve shared responsibilities for operating expenses between the landlord and the tenant.
An Example to Illustrate
Imagine you're looking to lease a commercial space, and it's a full-service gross lease. The advertised rent is $25 per square foot, while the operating expenses for the previous year (and the projected current year) are $8 per square foot.
In the first year of the lease, your rent will be $25 per square foot. However, any increases in operating expenses over time, beyond the $8 per square foot base year amount, will be the responsibility of the tenant. For instance, if the operating expenses increase to $9 per square foot the following year, the landlord pays $8, and the tenant pays the remaining $1. This cost-sharing is done proportionally based on the tenant's share of the space.
Benefits and Risks
From a landlord's perspective, using a base year helps control costs and prevents sudden, significant expense increases.
For tenants, there's a potential risk. If operating expenses rise substantially, tenants may face higher costs. It's advisable for tenants to negotiate limits on expense increases when agreeing to a base year to mitigate this risk.
Understanding the concept of a base year is crucial in commercial real estate leasing. It helps both landlords and tenants manage operating expenses effectively.
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