Hidden Traps in Base Years and Expense Stops
Previously, we defined the terms “base year” and “expense stop.” By their definitions, they appear to be pretty simple. The landlord uses a formula to justify the expenses he incurs operating the building. Anything over that amount incurred in subsequent years, the tenant pays.
Be careful, because there are holes in the system. In the case of expense stops, there are at least two things to look out for. First, look at what the landlord puts into the expense stop and check to make sure the number he puts in the lease relates to some real number. We have seen leases where the landlord made up a number, did not provide any documentation (probably because he wasn't asked), and then, when the actual costs were stated, the number was substantially higher. Guess what? The tenant had to pay the difference. Rule number one: Get a copy of the last four years’ actuals before you sign the lease.
Another common expense stop issue addresses what the landlord can actually throw in the mix. Since the lease probably states that you are liable for any operating expenses pertaining to the building, what's to prevent the landlord from throwing in stuff you never imagined? Yes, it does happen.
Base years are more rigid. In dealing with a base year, you make future comparisons to not only the amount of the expenses incurred during that year, but you also have some protection as to what is included in the list of expenses. If the landlord added something in year two that wasn't in the base year, you can argue that item must be removed. There are, however, still some tricks waiting.