Let’s Play With the Numbers
What happens if we change the base year amount? In theory, your base year should reflect the sum total of all the operating expenses the landlord incurred in operating the building during the calendar or fiscal year stated in your lease. Those expenses typically include all maintenance costs, real property taxes, insurance costs, and a laundry list of other individual items, including management fees. The items that were listed on your first reconciliation statement should be the only cost items the landlord should carry over to subsequent years.
Wait—is there a loophole? What happens if the landlord decides to add or take away a service during the term? Should this affect your Base Year? No.
Here's an example: Your base year expenses are established at $8.00 per square foot. If your rent is $18.00 PSF, $10 goes towards non-operating expenses such as marketing, capital expenses, profit, debt service, tenant improvements, and more. Let's say the landlord stops providing security service, which saves him $.50 PSF per year. Should your base year be reduced? Don't let him. Let's say he reduces your base year by $.50 and carries it through in each subsequent year. Logically, you will pay the same ratio increase in each subsequent year.
Where did that $.50 go? You're still paying the same $18.00 PSF in rent. Why not lower your rent too? Because operating expenses are classified as part of the rent.
What if he adds a service? Unlike an expense stop, where you are obligated to pay all expenses that exceed that agreed upon amount, a base year establishes not only an amount, but also what that amount includes. You should be obligated to pay only the amount that exceeds the cost of your services established in your base year. Complicated? Read on—there’re more chapters to come.