CRE glossary
Base year
The base year is the first year of a modified gross commercial lease, the year that sets the operating-expense floor (the 'expense stop'). The tenant pays only the increases in operating expenses over the base year, not the full operating cost. Base year selection and grossup language can shift hundreds of thousands of dollars over the term.
Base year mechanics: in year 1, tenant pays base rent only (no OpEx pass-through). The actual operating expenses for year 1 are the stop. From year 2 onward, tenant pays base rent plus their pro-rata share of OpEx increases over the stop. By year 7, OpEx might have risen 20%, the tenant pays 20% × pro-rata share, the landlord eats the original stop level.
The grossup clause normalizes the base year as if the building were 95% occupied (sometimes 100%). Without grossup, an under-occupied year 1, fewer tenants, lower janitorial spend, lower utilities, produces an artificially low stop. When occupancy normalizes in year 2, OpEx rises and the tenant pays the difference. Grossup is the tenant's protection against this distortion.
Some leases reset the base year on renewal. Standard renewal terms reset the base year to the renewal year's actual OpEx, restarting the protection clock. Some aggressive landlords push for periodic base-year resets within the original term (e.g., every 5 years). Push back hard against mid-term resets; they erode the tenant's structural protection.
Example
- Year 1 actual OpEx (the stop)
- $11.50/SF
- Year 2 OpEx
- $12.00/SF
- Tenant pays in year 2
- $0.50/SF (over the stop)
- Without grossup at 80% occupancy
- Stop is artificially low; tenant overpays
- With 95% grossup
- Stop normalized; tenant protected
Broker perspective
Specify in writing at LOI: (1) Year 1 of the lease is the base year. (2) Grossup at 95% occupancy. (3) No mid-term base-year resets. (4) Base year resets only on renewal. Without these, the modified-gross structure can produce 'gotcha' bills in year 2 that nobody anticipated.
Frequently asked
People also ask
Base year vs expense stop, same thing?
Effectively yes. Base year is the year (year 1); expense stop is the dollar amount (the actual OpEx for year 1). Used interchangeably.
Can I negotiate a different base year?
Sometimes, for tenants signing in lease-up buildings, a year 2 base year is cleaner. Most landlords resist.
Does the base year apply to taxes?
Usually yes. Real estate taxes are operating expenses subject to the stop. Some leases carve them out, confirm.
What's a 'rolling base year'?
Aggressive landlord structure where the base year resets every N years within the original term. Push back hard; this erodes the protection.
Related terms
Modified gross lease
A hybrid where the landlord covers some operating expenses in base rent and passes through others, middle ground between full-service and NNN.
Expense stop
The base year operating-expense level in modified gross leases, tenant pays only increases over this floor.
Operating expenses (OpEx)
All costs to run the building, taxes, insurance, utilities, janitorial, management, that get passed through to tenants in NNN and modified gross structures.
Common area maintenance (CAM)
Tenant's share of the cost to operate and maintain shared building areas, lobbies, parking, landscaping, HVAC, security.
See base year extracted from a real lease.
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