Overlooked by many tenants, the base year calculation can be one of the most important expenses established for a lease because typically the tenant does not have to pay any excess operating expenses during this time. However, a mistake made in the base year calculation can have devastating effects on leasing costs over time, costing the tenant thousands, if not millions, of dollars over the lifetime of the lease. At Dallas attorney Bruce E. Turner has assisted a number of clients who were previously hurt by mistakes in base year calculations. He can help you avoid the same mistakes in your lease agreement.
What is the “Base Year” Calculation?
Typically seen in full service or modified gross leases, the landlord will cover the tenant’s share of the building’s annual operating expenses but limit their exposure after the first year by only paying the amount of expenses incurred in the first year, known also as the “base year.” This amount becomes the benchmark for the landlord, and any additional operating expenses are passed through to the tenant in future years. Because this benchmark number affects all future payments for excess operational expenses, a mistake in the base year calculation can cost a tenant significantly over the life of the lease.
How do Base Year Mistakes Occur?
There are many discrepancies in accounting that can create base year calculation mistakes. One of the most common mistakes in base year calculations is improper gross up, especially if the building had significant vacancy during the first year of tenancy. If the landlord does not properly gross up the variable expenses to reflect full occupancy, errors can occur. Another common issue is the deferral of expenses, where the landlord will hold off paying expenses until after the base year expires or delay a significant expenditure knowing that the tenant will have to cover the additional costs in the future. This happens more often when a tenant is leasing a significant portion or all of a landlord’s building.
How to Avoid Base Year Errors
When trying to figure out whether the landlord properly grossed up the building for base year calculations, it can be difficult to evaluate the situation without comparison. Requesting copies of the building’s expenses for the year or two prior to the base year in addition to the building budget for the base year can help determine whether there are any attempts to defer expenses during the base year. If the building had more tenants in prior years, it can also help to establish the proper costs for gross ups in the base year calculations. However, the best option for avoiding base year errors is hiring an attorney to review the real estate documents and ensure that no mistakes were made in calculating your base year rate.
Our Office can Help
The longer you wait to evaluate your base year rate, the more difficult it is to fix any errors in calculation. If you have questions about your lease base rate, the office of Bruce E. Turner with Bennet, Weston, LaJone & Turner can help. Call or contact the office today to schedule a review of your lease documents with one of our experienced real estate attorneys.