Base Year

Hello landlords and tenants, I’m going to discuss the importance of a “base year”, and its definition, in the context of a commercial real estate lease. I’m Jenna Zebrowski, the attorney behind LawByJZ.com.

The base year is the starting point for the calculation of expense increases.  This should be defined in the lease, so everyone knows how much increases are and when they are going to happen.  The lease might cap or control your expenses, but only if you ask for it.

---

Commercial Real Estate Case Study

A Base Year is a Great Year for Capital Improvements

Irene’s company had been in their office location for over 10 years. They were in the process of negotiating a commercial lease renewal with the landlord. The landlord was getting ready to start updating and upgrading all of the elevators and stairways in the buildings.  Irene received the proposed lease amendment from landlord and saw that it included a reset base year and a rent increase that was more than she was expecting.

Irene wasn’t sure what this meant for her specific situation, and if it was something to accept or to negotiate.  Her company was excited about the new elevators. The workers were spread out on multiple floors, and the old elevators were slow and the stairways didn’t have very good ventilation. Irene wanted to understand what the base year reset means for her business and the budget and why the rent was going up.

The base year is the starting year, and tenant will pay increases in costs after that year.  So if the landlord did the repairs during the base year, Irene’s company wouldn’t pay any of the increase.  If they did the repairs after the first year, Irene’s company would pay for its proportionate share of the increase.

Irene discovered the landlord planned to do the work over two years.  The lease extension was for eight years.  Under the current lease, the base year was from five years ago, so Irene’s company would pay its full share of the cost of the improvements. With the new base year, Irene’s company wouldn’t start paying increase until after the new base year.  Irene was really excited to understand what this meant for her business.  She understood that the rent increase was actually not unreasonable when put into the context of the base year.  Her business wouldn’t pay the costs of the improvements in the base year, they would only have to contribute to the increases after the base year.  Since the work was going to take 2 years, they basically only had to pay for the increases in the second year, not both, which was great news for the company’s cash flow and commercial real estate leasing cost projections.

Irene was glad her attorney took the time to review the lease amendment in detail and explain to her, in plain English, how the base year reset actually affected her specific rent structure and cost increases.  Irene knew exactly what she was getting into when she signed the lease modification, and was confident she got the best deal for her company’s dollar.