WHAT IS A BASE YEAR LEASE???

The term "base year" refers to the payment of property expenses under a lease. The term "triple net" generally portray a situation where the tenant reimburses the landlord for taxes, insurance, and common area maintenance of the property (in addition to paying base rent for its space). A gross lease is essentially the opposite. It portrays a situation where the landlord takes on most of those expenses without tenant reimbursement. A base year lease is sort of the middle ground between those two lease types. Base year scenarios are predominantly found in office leases. Here's how they work:

In theory, the landlord knows what its investment is in the office building right now, and what the return on that investment is given the present income and expense situation at the property. The landlord is satisfied with that scenario, and is willing to invest in the property and take on the taxes, insurance and common area expenses as they exist now. However, what if those costs skyrocket? Then, the landlord's investment returns can get eaten into substantially. That's where a base year lease comes in.

Under a base year lease, the "base year" is typically the calendar year that a particular tenant first occupies the premises (that's the general rule, anyway). The tenant under the lease only reimburses its share of the property expenses to the extent that they exceed the amount of those same expenses for the base year. That's probably a little confusing, so let's do an example.

The law firm of Smith and Jones moves into a nice office building in June of 2008. Under it's lease, the base year would typically be the calendar year 2008. Smith and Jones would reimburse the landlord for its pro rata share of building expenses in 2009 and beyond (not in 2008), but only to the extent that those expenses exceed the amount of the base year expenses. So, let's say that the 2008 base year total expenses for the building is $1 million dollars. During the base year, the tenant does not reimburse the landlord for any such expenses. However, let's say that those costs increase to $1.1 million dollars in 2009. In that case, Smith and Jones would pay its pro rata share of the $100,000 increase in expenses over the base year (whereas under a triple net lease they would pay their share of all $1.1 million). If expenses in 2009 stay at $1 million, then Smith and Jones wouldn't be responsible for reimbursing the landlord for anything in 2009, either.

This type of lease allows the landlord to count more heavily on getting the return on investment that it has today. It takes on today's costs, but any increases belong to the tenants.