Your lease has a base year for operating expense calculations but does not gross up the base year expenses to reflect full occupancy. If the building was partially vacant during the base year, the base year expenses will be artificially low, meaning you will pay higher expense increases in subsequent years than intended.
By Angel Campa, Founder · Updated March 2026
Flagged when base year gross-up is false and a base year is specified in the lease.
Consider a building that was 75% occupied during the base year. Variable operating expenses that year totaled $750,000, but at full occupancy they would have been $950,000. Your expense stop (base year amount) is set at $7.50 per RSF instead of the grossed-up $9.50 per RSF. In year two, when the building reaches 95% occupancy, expenses rise to $950,000 — a $200,000 "increase" that is really just the building filling up. On 10,000 RSF with a 10% pro-rata share, you pay $20,000 in year-two escalations that would not exist with a grossed-up base year. Over a 10-year lease, this base year distortion can cost $50,000 to $80,000 in excess pass-through charges.
Require that the base year operating expenses be grossed up to 95% occupancy for all variable expenses. This ensures your expense stop reflects normalized building operations, not the anomaly of low occupancy during the base year. Verify which expenses are classified as variable versus fixed for gross-up purposes. If the landlord resists grossing up the base year, negotiate a higher expense stop or a cap on year-over-year expense increases to offset the distorted baseline.
The base year is the first year of the lease term, and its operating expenses become the baseline for calculating future expense pass-throughs. The tenant pays their share of any operating expenses that exceed the base year amount in subsequent years.
Variable operating expenses like utilities, janitorial, and elevator maintenance increase with occupancy. If the building is only 70% occupied in the base year, these costs are lower than they will be at full occupancy. As the building fills up, expenses rise — and without a gross-up, that increase is passed through to tenants even though it reflects occupancy changes, not actual cost inflation.
They are related but distinct. Operating expense gross-up adjusts current-year expenses. Base year gross-up adjusts the base year itself. Both should be present in a well-drafted lease to ensure fair expense allocation regardless of building occupancy fluctuations.
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