Base Year
The reference year used in modified gross leases to establish a baseline for operating expenses, above which tenants pay increases.
Definition
In modified gross leases, the base year sets the operating expense benchmark. The landlord covers expenses up to that year's level, and tenants pay their pro-rata share of any increases in subsequent years. This protects landlords from rising costs while giving tenants expense predictability in year one. The base year is typically the calendar year the lease commences or the first full year of occupancy. When negotiating leases, tenants should understand whether base year expenses are actual or estimated, as this affects future pass-throughs. Base year stops are less common in small bay industrial (where NNN dominates) but appear in modified gross structures favored by some operators.
Example
A tenant signs a modified gross lease starting January 2024 with a 2024 base year. Operating expenses that year total $4.50/SF. In 2025, expenses rise to $4.85/SF. The tenant pays the $0.35/SF increase ($0.35 × their square footage) in addition to base rent.