Base Year Versus Expense Stop
There are more additional expenses. It is generally accepted that tenants will pay a portion of the additional costs a landlord incurs in operating the building they reside in. How much of that increase is the responsibility of each individual tenant and how that additional cost is calculated, are two separate matters. First, let's touch on the two generally accepted types of "additional rent" and what each means.
What is in a definition?
Not all additional rents are structured in the same way. Some landlords use a base year method while others prefer an expense stop. While both address the same issue (i.e. that the tenant is responsible for some portion of the additional cost of operating the building beyond some baseline amount), these two methods differ considerably.
Part of your rent in year one, let’s says $18.00 PSF per year, goes towards the landlord's debt service and profit. The remainder goes towards operating the building. In a base year scenario, let's say $10 goes towards debt service and profit and $8.00 goes towards building operation. If your lease calls for a base year, $8.00 is set as your baseline amount, and your lease will state what calendar year is your personal base year. Should the actual expenses increase in year two to $8.12, you pay not only the contract rental increase, if any, but you also pay $.01 PSF as "additional rent” or "additional operating expenses," depending how the landlord names it. If it goes down, the landlord keeps the profits as a "reward" for keeping the expenses down.
An expense stop operates in much the same manner, with a key difference. In contrast to a base year approach, the landlord simply gives you a number, maybe $8 PSF, and tells you that $8.00 of your rent goes towards building operating expenses and anything above that you pay. This may seem similar, but just wait. Read on to other chapters of our ongoing story.