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What Is a Base Year in a Commercial Lease? Definition, Errors, and Traps

By Angel Campa, Founder, CAMAudit

Quick Answer

In a modified gross or full-service commercial lease, the base year sets a financial floor for operating expenses. The landlord absorbs all costs up to the amount incurred during that year. In subsequent years, the tenant only pays their pro-rata share of increases above that baseline.

The base year is one of the most consequential terms in a commercial lease, and also one of the least understood at signing. It looks like a simple definition: one year, one number, one floor. In practice, it anchors every CAM reconciliation the tenant will receive for the duration of the lease. Get it wrong at the start and the error compounds annually.

This page explains how the base year works, where landlords and tenants both make mistakes, and what to check in your lease before the first reconciliation arrives.

Base Year vs. Expense Stop: Two Different Structures

Commercial leases use two main mechanisms to limit landlord exposure and define tenant reimbursement obligations. They look similar but behave very differently.

Base Year

  • • Tied to actual expenses incurred during a specific calendar year
  • • Floor amount changes if base year expenses are later audited or restated
  • • Tenant pays pro-rata share of increases above the actual base year figure
  • • Common in full-service and modified gross leases
  • • Requires landlord to track and disclose base year actuals

Expense Stop

  • • A fixed dollar-per-SF amount written into the lease at signing
  • • Floor never changes regardless of actual expenses in any year
  • • Tenant pays all operating costs above the fixed stop amount
  • • Common in gross leases with negotiated landlord contributions
  • • Simpler to administer but offers no market-rate calibration

BOMA's Guide for Office Buildings (BOMA GT) and commercial real estate resources from CARR distinguish these two structures. The base year approach is more common in long-term office and retail leases because it ties the tenant's floor to actual market conditions at lease commencement. The expense stop approach is more predictable but may expose tenants to over-billing if actual costs come in below the stop.

The Anomaly Year Trap

Pandemic Base Years Are a Ticking Problem

A base year set during an artificially low period creates a permanently depressed floor. Tenants who signed leases in 2020 or 2021 with base years matching their commencement year locked in CAM figures from a period when buildings were operating at 30 to 50 percent of normal occupancy. Every year since, reconciliations have shown large "increases" above that base. Most of those increases are not real inflation. They reflect the building returning to normal operating costs.

This is the anomaly year trap. When the base year coincides with a period of reduced building activity, the baseline does not represent normal operating costs. Future years do not need to have unusually high expenses to show large increases above the floor. They just need to be normal.

The same dynamic occurs in buildings that were under construction or newly opened during the base year. Partially leased buildings in their first year of operation carry lower operating costs than a stabilized property. Tenants who signed during that period face an effective penalty in every subsequent year, not because expenses grew abnormally but because the floor was set below a realistic stabilized baseline.

BDO's lease audit work from 2020 documented this issue specifically: base years set during periods of reduced occupancy create structural over-billing that persists until the tenant audits or the lease expires.

Failure to Gross Up the Base Year

Low-occupancy base year expenses are only half the problem. The second error is failing to gross up that base year figure to reflect what the building would have cost at full occupancy.

Gross-up adjusts variable operating expenses using the formula:

adjusted_expenses = actual_expenses × (target_occupancy / actual_occupancy)

When a base year is not grossed up and actual occupancy was, say, 60 percent, the base year figure might be $8 per square foot. A stabilized building running at 95 percent occupancy might cost $12 per square foot to operate in that same year. The tenant's floor is set at $8 instead of $12, and that $4 gap becomes their responsibility in every reconciliation going forward.

Every future year, the tenant pays for the difference between the depressed base and the stabilized cost level, even in years when real expenses barely moved. Resources from Bryckel.ai on CAM lease landmines identify ungrossed base years as one of the highest-cost structural errors in commercial leases, because the impact is not a one-time discrepancy. It repeats for the life of the lease.

Leases negotiated during high-vacancy periods should include explicit base year gross-up language. Many do not. When the gross-up provision is absent, tenants have limited recourse once the lease term begins.

Base Year Errors Cascade into Cap Calculations

The base year does not just set the floor for expense reimbursements. It also anchors every cap calculation in the lease.

Most CAM caps limit annual growth above the prior year's actual charges. In a cumulative cap structure, the starting point for tracking that growth is the base year. If the base year figure is artificially low, the "growth" in year one is overstated. The cap may absorb some of that growth, but the anchor for all subsequent years remains wrong.

A tenant with a 5 percent cumulative cap and an undergrossed base year will find that:

  • Year one shows an apparent large increase, partially absorbed by the cap bank
  • The cap bank draws down faster than it should because the growth figures are inflated
  • By year three or four, the bank is depleted and the tenant bears the full cost of normal operating increases on top of the normalization charges

Base year errors do not merely affect the first reconciliation. They affect every reconciliation, every cap calculation, and every dispute analysis for the entire lease term. For a detailed explanation of how cap structures work and where errors appear, see the CAM expense caps resource.

What to Check in Your Lease

1

Confirm the base year definition

Is the base year defined as a specific calendar year (e.g., 2023) or as the lease commencement year? Commencement-year definitions can create ambiguity when the lease starts mid-year, because the landlord may only have six months of actuals to establish the floor.

2

Assess whether the base year was a normal operating year

Pull the building occupancy for the base year. If it was below 85 percent, or if the building was under construction or newly opened, the base year expenses are likely below stabilized levels. That gap is your structural over-billing exposure.

3

Verify the base year gross-up provision

Check whether the lease requires the base year to be grossed up to target occupancy. If no gross-up language exists and the base year occupancy was low, calculate the difference between actual and grossed-up base year expenses. That dollar amount multiplied by your pro-rata share is approximately what you are overpaying annually.

4

Check consistency across the portfolio

In multi-tenant buildings, all tenants should have base years from the same stabilized period, or each tenant's base year should be individually grossed up. Inconsistent base years create situations where some tenants bear a disproportionate share of normalization costs depending on when they signed.

How Base Year Errors Connect to the Broader Reconciliation Process

A base year problem rarely travels alone. It interacts with every other reconciliation mechanism in the lease. Gross-up errors compound it. Cap errors obscure it. Admin fee calculations are applied on top of already-inflated charges.

The clearest sign of a base year problem is a pattern: reconciliation bills that increase every year by more than inflation, with no corresponding spike in actual building expenses. Tenants who see this pattern should compare the base year occupancy to the current occupancy before assuming the landlord's math is correct.

For more on the specific errors that appear in CAM reconciliations and how they interact, see the CAM reconciliation errors guide. For the foundational mechanics of how annual reconciliations work, the what is CAM reconciliation overview covers the full process.

Frequently Asked Questions

What is a base year in a commercial lease?

In a modified gross or full-service lease, the base year is the calendar year used to set the baseline for operating expense reimbursements. The landlord absorbs all costs up to the amount incurred during that year. Tenants only pay their pro-rata share of increases above that baseline in subsequent years.

What is the difference between a base year and an expense stop?

A base year is dynamic: it ties the expense floor to actual costs incurred during a specific calendar year, so it reflects what the building actually cost to operate. An expense stop is static, a fixed dollar-per-square-foot amount written into the lease at signing, regardless of actual expenses. A $10/SF expense stop never changes; a 2022 base year floor changes as the definition of 'actual 2022 expenses' is applied to future reconciliations.

What happens if my base year was set during the pandemic?

A pandemic-era base year is one of the worst lease terms a tenant can sign. Building occupancy and operating costs were artificially suppressed in 2020 and 2021. When the building returned to normal occupancy levels in later years, the expense increases looked massive on paper, but they reflected normalization, not real inflation. Tenants with 2020 or 2021 base years have been paying for that normalization ever since.

Should the base year be grossed up?

Yes, in almost every case where the base year coincided with below-normal occupancy. Without a gross-up, the base year CAM figure is artificially low, and every future reconciliation will show inflated 'increases' above that depressed floor. The gross-up adjusts the base year expenses to what they would have been at target occupancy, typically 95%, so the starting floor reflects a stabilized building.

Check Your Base Year Before the Next Reconciliation

CAMAudit analyzes your CAM statements against your lease terms, flags anomaly year base years, and calculates the dollar impact of ungrossed base year figures across your entire portfolio.

Check Your Base Year