The base year looks like a fixed number in the lease; it is in fact a measurement, and the gross-up clause decides what it measures.
Under a base year expense stop, the landlord pays the building's operating expenses up to the level of a stated base year, and the tenant pays its pro rata share of any increase above it. The base year is a measurement, so the gross-up clause matters: on an illustrative office whose base year was 70 per cent occupied, a 10,000 sq ft tenant pays $190,089 over five years without a gross-up and $81,972 with one, a $108,117 difference on the same costs.
Worked in full in How to Read a Commercial Lease by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
The mechanism is simple: the rent is quoted gross, inclusive of the base year's expenses, and only the growth is passed through. The trap is that operating expenses are partly variable. Cleaning, utilities and some management costs scale with how much of the building is occupied. If the base year was a lease-up year, its expenses were artificially low, and every later year's increase over it is inflated by occupancy rather than by cost.
| Input | Value |
|---|---|
| Building area, sq ft | 200,000 |
| Tenant area, sq ft | 10,000 |
| Pro rata share | 5.0% |
| Fixed expenses in the base year (insurance, structure, fixed contracts) | 1,600,000 |
| Variable expenses at 100% occupancy | 2,000,000 |
| Cost growth a year | 3% |
| Occupancy: 2026 base year / 2027 to 2029 / 2030 / 2031 | 70% / 95% / 80% / 95% |
| Gross-up level in the lease | 95% |
Recoveryyear = pro rata share × MAX(0, Opexyear − Opexbase)
Grossed-up opex = fixed + variable at 100% × MAX(actual occupancy, gross-up level)
In Excel: =Share*MAX(0,Opex_Y-Opex_Base), with each year's opex computed twice, actual and grossed up, on separate rows so the lease's choice is visible.
The share itself, 5.0 per cent here on a whole-building denominator, is a negotiated term in its own right; how the denominator moves it is worked in how to calculate a tenant's pro rata share of CAM.
The base year. At 70 per cent occupancy, variable costs were 1,400,000, so actual expenses were 1,600,000 + 1,400,000 = 3,000,000, or $15.00 per sq ft. Grossed up to 95 per cent, the variable costs are 1,900,000 and the base is 3,500,000, $17.50 per sq ft.
The first comparison year. In 2027 the building is 95 per cent occupied and costs have grown 3 per cent: expenses are 3,605,000. Against the actual base the excess is 605,000 and the tenant's 5.0 per cent is 30,250. Against the grossed-up base the excess is 105,000, which is pure cost growth, and the tenant pays 5,250. The difference, 25,000, is $2.50 per sq ft that the tenant would pay purely because the building was emptier when its lease was signed.
| Year | Occupancy | Actual opex | No gross-up | Gross-up, every year | Gross-up, base year only |
|---|---|---|---|---|---|
| 2027 | 95% | 3,605,000 | 30,250 | 5,250 | 5,250 |
| 2028 | 95% | 3,713,150 | 35,658 | 10,658 | 10,658 |
| 2029 | 95% | 3,824,544 | 41,227 | 16,227 | 16,227 |
| 2030 | 80% | 3,601,628 | 30,081 | 21,964 | 5,081 |
| 2031 | 95% | 4,057,459 | 52,873 | 27,873 | 27,873 |
| Five years | 190,089 | 81,972 | 65,089 |
Without a gross-up the tenant pays $108,117 more over five years, $2.16 per sq ft a year on space that might rent for a multiple of that. The 2030 row shows the other side. Occupancy falls to 80 per cent, actual expenses dip, and without a gross-up in the comparison year the landlord's recovery collapses to 5,081 against a grossed-up 21,964, even though the cost per occupied foot has risen. A gross-up that applies to every year is the only version that passes through cost growth and nothing else.
| Base year occupancy | Base year opex | 2027 recovery | Per sq ft |
|---|---|---|---|
| 70% | 3,000,000 | 30,250 | 3.02 |
| 80% | 3,200,000 | 20,250 | 2.02 |
| 90% | 3,400,000 | 10,250 | 1.02 |
| 95% | 3,500,000 | 5,250 | 0.53 |
Each 10 points of base year vacancy adds $1.00 per sq ft a year to the tenant's bill, every year of the lease, because the low base is permanent. A tenant signing into a building in lease-up is the one who most needs the gross-up, and is often the one least likely to ask for it.
The common mistake is to read "base year 2026" as a fixed number and stop there. It is not fixed until the 2026 expenses are reconciled, and what they measure depends on four further questions: whether the base is grossed up, to what occupancy, whether comparison years are grossed up the same way, and which costs are excluded from the pool. A one-sided clause, gross-up for the comparison years only, gives the landlord the benefit of both low base and full recovery. A tenant reviewing the lease should require the same gross-up for the base and every comparison year, and a landlord should insist on it for the comparison years, as 2030 shows. Caps on the pass-through add another layer, worked in cumulative versus non-cumulative CAM caps.
A base year stop passes through cost growth only if the base and the comparison years are measured at the same occupancy. Here the difference between having and not having that symmetry is $108,117 over five years on a 10,000 sq ft lease. The free companion documents for this book include the recovery checklist with the gross-up and the four recovery structures side by side.
Take the year's operating expenses, subtract the base year expenses, and multiply the excess by the tenant's pro rata share, its area over the building's. On an illustrative office, 2027 expenses of $3,605,000 against a grossed-up base of $3,500,000 leave $105,000 of excess; a 5.0 per cent tenant pays $5,250.
It restates the variable operating expenses as if the building were at a stated occupancy, often 95 per cent, so that low occupancy does not distort the comparison. On the illustrative building, a 70 per cent occupied base year of $3,000,000 grosses up to $3,500,000, which cuts the tenant's first-year recovery from $30,250 to $5,250.
Both, at different moments. Applied to a low-occupancy base year it protects the tenant by raising the base. Applied to a later low-occupancy year it protects the landlord: in the illustrative 80 per cent occupied year the gross-up lifts the tenant's share from $5,081 to $21,964. A gross-up applied to the base year only favours the tenant on both counts.
This article is one calculation from How to Read a Commercial Lease. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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