An office tenant signed a 7-year lease with a base year of 2022. The lease stated base year operating expenses of $18.50/sq ft. The actual 2022 operating costs available from building records were $21.20/sq ft. CAMAudit calculated the understatement: $2.70/sq ft. For a 3,500 sq ft tenant, this inflated every year's charges by $9,450 above what they should have been, totaling $66,150 in cumulative overcharges over the lease term.
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07
Rule 7 of 20 · Math-based rule
Base Year Error: How a Low Starting Number Costs a Client Every Year of the Lease
The base year sets the floor for every future CAM charge. A base year that is too low functions as a permanent overcharge that grows with each year's expenses.
If a client's base year operating expenses were understated, every CAM reconciliation paid since lease signing has been inflated. A $10,000 base year understatement costs a 10% pro-rata tenant $1,000 per year for the life of the lease.
What it checks
A base year error in a commercial lease occurs when the operating expenses established for the base year are understated, causing tenants to pay charges above an artificially low starting point rather than above actual first-year costs. In leases with base year expense stops, tenants pay only for operating expenses that exceed the base year amount. When the base year expenses are set lower than the actual costs incurred in that period, such as due to vacancies, under-billing, incomplete records, or selective exclusion of cost categories, every subsequent year's charges are inflated by the same understated amount. CAMAudit's base year detection rule extracts the base year from the lease and the stated base year expense figure, then compares that figure against the actual operating expenses from the base year period when those records are provided. The tool calculates both the annual overcharge and the cumulative overcharge across the full lease term.
The math
Base Year Error in 3 checks
- 1
CAMAudit extracts the base year from the lease and the base year expense amount if it is specified in the lease or a lease exhibit. CAMAudit then compares that figure to the actual operating expenses from the base year period, which your firm can upload as a separate reconciliation document for that year.
- 2
CAMAudit's base year detection rule calculates the annual overcharge when the base year expenses on file are lower than actual costs for that period: the difference between the correct base year amount and the stated base year amount, multiplied by the client's pro-rata share. Over a multi-year lease term, even a modest base year understatement results in significant cumulative overcharges.
- 3
CAMAudit also checks whether the landlord properly included all operating expenses in the base year calculation or selectively excluded cost categories to lower the baseline artificially. Selective exclusions that do not appear in the lease definition are a form of base year manipulation that CAMAudit flags.
What a finding cites
Related glossary terms
FAQ
Questions about base year error
What is a base year in a commercial lease?
A base year is the reference year used to calculate a tenant's share of operating expense increases. In a gross lease with an expense stop, the tenant pays only for operating expenses that exceed the base year amount. The base year is typically the first full calendar year of the lease term, though it can be any year specified in the lease.
Why would a landlord understate base year expenses?
A landlord may understate base year expenses intentionally to generate ongoing overcharge revenue, or inadvertently due to accounting errors, incomplete billing in the base year, or vacancies that reduced actual costs below stabilized levels. Intentional understatement is grounds for a dispute. Inadvertent errors in the base year are correctable through negotiation.
How does a firm get the actual base year operating expenses?
Request the building operating expense records for the base year under the lease's audit rights clause. Landlords are typically required to provide supporting documentation upon written request. CAMAudit's dispute letter draft includes language for requesting these records and specifying which expense categories must be itemized.
What if a client's lease does not specify a base year expense amount?
If the base year amount is not stated in the lease, it should default to the actual operating expenses incurred in the base year. Request the base year reconciliation or operating expense report from the landlord. If the landlord cannot provide it, that inability is itself grounds for a dispute over the accuracy of subsequent reconciliations.
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