Base Year Stops In Manhattan Office Leases

You might agree on a great base rent for a Manhattan office, only to see your real costs climb each year. The reason is often a single clause in your lease: the base year stop. If you understand how it works, you can budget accurately, negotiate smarter terms, and avoid surprises at reconciliation. This guide breaks down the mechanics, shows step-by-step math, and flags the Manhattan-specific items that move the numbers. Let’s dive in.

Base year stop basics

A base year stop sets a baseline for a building’s covered operating expenses in a defined year, often the year your lease starts. You pay your proportionate share of any increases above that baseline in future years.

An expense stop is similar but expressed as a dollar amount per rentable square foot. The landlord absorbs expenses up to the stop. You pay your share of any amount above it.

Operating expenses (OPEX) usually include property taxes, building insurance, common area utilities, janitorial, security for common areas, elevator and HVAC servicing for common areas, management fees, snow removal, and routine repairs. Expenses commonly excluded include the landlord’s mortgage payments, depreciation, income taxes, leasing commissions, tenant-specific buildout costs, costs to correct prior violations, legal settlements, unusual one-time costs, and certain capital expenditures. These lists are negotiable, so definitions matter.

How the math works

Your pass-through is based on three pieces: your share of the building, the increase in covered OPEX above the base, and the lease’s calculation rules.

• Tenant Share = Tenant rentable area ÷ Building rentable area
• Expense Increase = Current Year Covered OPEX − Base Year Covered OPEX
• Tenant Charge = Tenant Share × Expense Increase

Example 1: Base year stop

• Building rentable area: 100,000 RSF
• Tenant rentable area: 5,000 RSF → Tenant Share = 5%
• Base year covered OPEX: $2,000,000
• Year 2 covered OPEX: $2,400,000
• Expense Increase = $400,000
• Tenant Charge = 5% × $400,000 = $20,000 → $4.00/RSF for that year

Example 2: Expense stop expressed per RSF

• Expense stop: $20/RSF
• Current year OPEX: $24/RSF
• Tenant pays the difference: $4/RSF
• For 5,000 RSF → Tenant Charge = $4 × 5,000 = $20,000

Annual reconciliation and true-up

Most tenants pay estimated monthly charges based on a budget. Once actuals are finalized, the landlord reconciles.

• Estimated payment: $2,500/month
• Actual allocable amount: $2,900/month
• Underpayment: $400 × 12 months = $4,800 billed at true-up

Effective rent and why it rises

Pass-throughs add to your base rent, which increases your effective rent each year. If your base year is your commencement year, you typically owe no pass-throughs in year 1.

• Base rent: $60/RSF per year
• Base year OPEX: $30/RSF
• If Year 2 OPEX rises to $36/RSF, the increase above base is $6/RSF
• Effective rent in Year 2 = $60 + $6 = $66/RSF

Two scenarios to model in Manhattan

The Manhattan drivers that push OPEX include property taxes, labor-intensive services, utilities, and energy compliance work. Here are two five-year scenarios to show how OPEX growth shifts your costs. Assumptions: 5,000 RSF tenant, $60/RSF base rent, $30/RSF base year OPEX, base year equals Year 1.

Scenario A: 2% OPEX growth per year

• Five-year cumulative pass-through: $6.12/RSF = $30,600 total
• Five-year average effective rent: about $61.22/RSF

Scenario B: 6% OPEX growth per year

• Five-year cumulative pass-through: $19.11/RSF = $95,550 total
• Five-year average effective rent: about $63.82/RSF

The gap between scenarios is meaningful. In a higher-inflation environment, you should model year-by-year costs, not just base rent.

Why gross-up matters in Manhattan

A gross-up provision lets the landlord adjust variable operating expenses as if the building were at a stabilized occupancy, often 90 percent. This prevents tenants from benefiting from unusually low expenses during vacancy periods.

Consider a simplified example with a 100,000 RSF building and a 5,000 RSF tenant. The base year covered OPEX is $2,000,000. In Year 2, actual allocable OPEX is $1,700,000 at 50 percent occupancy. If the lease requires a 90 percent gross-up, the landlord adjusts the $1,700,000 as if the building were 90 percent occupied. The adjusted amount would be higher than the actual figure, which increases the expense increase used for pass-throughs. Without a gross-up, the lower actual expenses could reduce or even eliminate that year’s pass-throughs.

In Manhattan, where vacancy can fluctuate by building and by block, the choice of gross-up percentage and the language around which costs are grossed up can have a real impact on your annual charges.

What it means for landlords and tenants

For landlords, base year stops help protect net operating income when expenses rise. Increases above the base year are reimbursed by tenants under the lease definition.

For tenants, the first year is predictable if the base year aligns with your start date. After that, your exposure to expense inflation grows. The pass-throughs sit on top of your base rent, which increases your effective rent and your total occupancy cost. You should model OPEX growth scenarios, especially in buildings with changing occupancy.

Negotiation points and red flags

Clear, specific definitions reduce disputes later. Ask for a detailed definition of operating expenses with an explicit list of inclusions and exclusions. Confirm how your tenant share is calculated and the measurement standard used.

Discuss capital expenditures. Typical practice is to exclude most capital items or allow amortization above a per-item threshold over an agreed useful life. You can negotiate thresholds, amortization periods, and caps.

Confirm exclusions for leasing commissions, landlord legal fees, mortgage interest and principal, depreciation, bad-debt reserves, penalties, and extraordinary one-time expenses unless clearly included.

Negotiate the gross-up. Many leases use 90 to 95 percent as the stabilization target. Clarify which expense categories are grossed up and how occupancy is measured, especially in periods of high vacancy.

Request audit and documentation rights. Annual audit rights with reasonable limits are common. Often the tenant pays for the audit unless a material error is found, in which case the landlord typically refunds and covers reasonable audit costs.

Consider caps and floors cautiously. Caps on pass-through increases can limit your exposure, but landlords may resist broad caps because they reintroduce expense inflation risk. Some leases use a hybrid where increases are passed through but cannot exceed a set percentage each year.

Confirm the base year. Many Manhattan leases use the commencement year as the base. Sometimes a prior year is proposed. An unusually high base year can reduce your pass-throughs later, while a low base year increases exposure. Verify the context before accepting either approach.

Get the billing timing right. Specify how estimates are billed, when reconciliations occur, and how overpayments or underpayments are handled. Clarify any interest on true-up balances.

Manhattan factors that move OPEX

• Real property taxes are a major cost in Manhattan and can vary significantly by asset. Exposure to tax increases above the base year is often the single largest component of pass-throughs.
• Utilities and HVAC can be higher in older buildings or in assets undergoing efficiency work. Energy prices and local emissions and efficiency requirements can push costs up over time.
• Labor and services cost more in Manhattan. Janitorial, security, and concierge programs can be material and are commonly included in pass-throughs.
• Occupancy volatility changes how shared costs are allocated. Gross-up language is important when vacancy is elevated or a building is in lease-up.

Quick review checklist

Use this list to review a lease or an LOI draft before you commit:

• Confirm the definition of Operating Expenses with clear inclusions and exclusions.
• Confirm how tenant share is calculated and which measurement standard applies.
• Check whether the base year is the commencement year or a different year.
• Verify gross-up language and the occupancy level used.
• Ask about capital expenditures: thresholds, amortization schedule, and inclusion or exclusion.
• Negotiate audit rights and the documentation you will receive to support reconciliations.
• Model low and high OPEX growth scenarios to see the impact on effective rent and total cost.
• Understand billing timing, reconciliation dates, and any interest on true-ups.

Need help modeling your Manhattan lease?

If you want a clean side-by-side of active spaces, we will build a year-by-year model that converts pass-throughs into effective rent and cash flow. As a vertically integrated operator-advisor, we understand how OPEX moves in practice and how gross-up, capital items, and taxes flow through real leases. Connect with Tide Realty Group to review terms, pressure test assumptions, and align your lease with your budget. Rise With Us.

FAQs

What is a base year stop in a Manhattan office lease?

• It sets the building’s covered operating expenses in a base year, and you pay your proportionate share of any increases above that amount in later years.

How does a gross-up affect my pass-throughs?

• The landlord can adjust variable expenses to a stabilized occupancy level, often 90 percent, which can increase the expense figure used for your pass-throughs when the building has higher vacancy.

Which operating expenses are typically included or excluded?

• Common inclusions are property taxes, insurance, common area utilities, janitorial, security, elevator and HVAC servicing, management fees, and routine repairs; common exclusions are mortgage costs, depreciation, income taxes, leasing commissions, tenant-specific buildout, fines, and certain capital items.

How do base year stops change my effective rent over time?

• Pass-throughs stack on top of your base rent, so your effective rent rises as operating expenses increase above the base year amount.

Can I cap annual increases in my pass-throughs?

• Some tenants negotiate caps on year-over-year increases, although many landlords resist broad caps; hybrid structures that limit increases are sometimes used.

What should I confirm about the base year before signing?

• Verify whether the base year equals your lease commencement year or a different year, and understand how that baseline will affect future pass-throughs given expected expense trends.