Building Operating Expense “Base Year” Explained

A “Base Year” is a term whereby the Landlord agrees to cover all the operating expenses of a building up to an amount established by a “Base Year” (normally the first year of the lease), and the Tenant will be responsible for their pro-rata share of any increase in expense for subsequent years.

Here’s an illustration of Base Year:

A tenant leases a 5,000 square foot office suite in a multi-tenanted building that has a total size of 25,000 square feet.

Tenant’s proportionate share of the building’s operating expenses is 20% (5,000/25,000).

Tenant’s lease commences in May 2011. The Lease states the Base Year is 2010.

The 2011 actual operating expenses totaled $225,000 (the “Base Year”).

The estimate for the 2012 operating expense is $236,250.

The increase in operating expense increase over the tenant’s Base Year is $11,250.

Tenant’s proportionate share results in $2,250 ($11,250 x 20%). Typically this amount is paid monthly ($187.50/month) at the same time as the Base Rent and at the end of 2011 a reconciliation is performed and any overage is credited to the following year or conversely any increase is charged back to the Tenant.

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