As we enter the final stretch of 2021, we want to remind tenants and their brokers to push for a 2022 Base Year on new leases and extensions. As lease administrators and tenant advocates, it can be frustrating to see a client commit to a new or extended term that starts in the second half of 2021, or even early 2022, and get stuck with a 2021 Base Year. Even worse is when we see situations where the Base Year is not reset on lease extensions.
What Is a Base Year?
For those not familiar with the Base Year concept, it applies to leases in which the tenant is responsible for their share of operating expense increases after the initial year. Since the landlord typically prepares financials on a calendar year basis, that “initial year” would need to be assigned an appropriate calendar year.
For example, if your lease commences in April 2021, the landlord is not going to base future expense increases over an initial year than runs from April 2021 to March 2022. They will instead base the increase on expenses incurred in the calendar year 2021, which seems reasonable given most of the tenant’s initial year was spent in 2021. Using that same logic, one should expect that if most of your initial year of the lease term will be spent in 2022, then 2022 should be the Base Year.
So why do tenants get stuck with an inappropriate base year? In many cases, it comes down to the issue being overlooked during negotiations. For new or extended leases, the landlord and its agent will continue to propose a 2021 Base Year until challenged. On renewals, the situation can be even more damaging if the Base Year year is not reset at all. The result for a tenant coming to the end of a five-year lease and committing to a new five-year term is their share of excess expenses will be based on figures that are five years old! This is ridiculous and can be costly to a tenant’s bottom-line.
Operating expense traps like the Base Year reset can be confusing and easy to overlook. That is why it is critical that companies bring in a tenant representative on all lease transactions, including what may seem like an easy renewal.
If you have questions about lease negotiations or renewals, and how the Base Year impacts your operating expenses, please do not hesitate to reach out to National Lease Advisors. Our team will be glad to walk you through it.