How to Escalate Additional Rents Using a Base Year

Often in commercial leases, additional rent such as operating expenses and taxes are escalated using something called a base year. This is usually the first year of the lease. Here is a quick and easy way to calculate what your base year expenses will be.

Difficulty: Moderate

Instructions

Things You'll Need:

• Base Year expenses for current year, which you can probably obtain from the landlord
• Calculator
• Computer generated spreadsheet

1. Take the latest base year expenses provided by the landlord, and escalate if necessary, so that you can get an idea of what the base year expenses will be under the lease. For example, if 2007 expenses total $1.00 per rentable square foot, escalate by a reasonable estimate, for example 3 percent, to get an estimate of what 2008 base year expenses will be. In this example, base year 2008 expenses will total approximately $1.03/rsf.

2. To get an estimate of what 2009 expenses will be, take the base year total of $1.03, and muliply it by 3 percent. Take that total, and subtract $1.03 (the 2008 base year) from your total: ($1.03 X 1.03 = $1.06. $1.06 - $1.03 = $0.03). Therefore, the total estimated additional rent for 2009 will be $0.03/rsf.

3. To get an estimate of what 2010 expenses will be, Take the $1.06 from Step 2, and multiply by 1.03 to get the total 2010 expenses. Then subtract $1.03 from that total, to get the total estimated additional rent for 2010: $1.06 X 1.03 = $1.09. $1.09 - $1.03 = $0.06. Therefore, the total estimated additional rent for 2010 will be $0.06/rsf.

4. Repeat Step 3 for each additional year of rent that you want to calculate.

Tips & Warnings

• For best results, use a computer generated spreadsheet so that you merely have to input a formula, to refer back to the original base year expense number.
• When calculating base year expenses, make sure to always subtract the base year number, in this example, $1.03, when you want to calculate the total additional rent owed above and beyond the base year. Do not just escalate each year by 3 percent or you will overinflate your estimates.