Published by Trico Realty, Inc. | Orange County Industrial Real Estate

If you’ve ever signed an AIR CRE Multi-Tenant Industrial Gross lease, you’ve probably come across the terms “base year” and “reconciliation.” For many tenants, those words are about as clear as the fine print on a software update — technically visible, but rarely understood until a bill arrives.

At Trico Realty, we’ve been helping businesses navigate exactly this kind of detail for over 55 years. So, let’s break it down in plain language.

First: What Is a Gross Lease?

In a standard Gross lease, the tenant pays one base rent amount and the landlord covers most operating expenses — property taxes, insurance, maintenance, and so on. It’s simpler and more predictable than a Triple Net (NNN) lease, where tenants pay their pro-rata share of those costs directly.

But “gross” doesn’t mean costs are frozen forever. The AIR CRE Industrial Gross lease form includes provisions that protect landlords from bearing 100% of cost increases over the life of a lease — and that’s where base years come in.

A note on lease type: Most Trico tenants are on Modified Gross leases and will receive reconciliations as described below. A small number of properties Trico manages operate under a Fixed CAOE structure. In these leases, the CAOE amount is a fixed charge — billed separately from base rent — with no year-end reconciliations to the tenant for CAM/CAOE, property tax, or property insurance. The fixed CAOE amount may include scheduled increases built into the rental schedule over the lease term, and is typically reviewed and adjusted at renewal if needed. If you’re on a Fixed CAOE lease, base years and reconciliation billings do not apply to you — this post is primarily relevant to Modified Gross lease tenants.

Three Separate Reconciliations — Not One

This surprises some tenants: there isn’t a single annual reconciliation. At Trico, we run three distinct reconciliations each year, billed separately:

• CAM / CAOE — Common Area Maintenance and Operating Expenses (Calendar Year: January 1 – December 31)
• Property Tax (Fiscal Year: July 1 – June 30)
• Property Insurance (Fiscal Year: September 1 – August 31)

The distinction between calendar year and fiscal year matters more than it might seem. CAM/CAOE expenses are tracked and reconciled on the calendar year. Property taxes follow a July 1–June 30 fiscal year, aligned with California’s standard property tax year. Property insurance follows a September 1–August 31 fiscal year, aligned with the building’s insurance policy term. Both are specified in Trico’s leases.

This is not standard AIR CRE boilerplate. Trico specifically modifies the lease form to define the fiscal year for both property tax and insurance, and the base year for each is identified in the lease accordingly.

What Is a Base Year?

A base year is a reference point. It establishes the landlord’s “baseline” cost responsibility for a specific expense category. The landlord absorbs costs up to that baseline as part of the agreed-upon rent. If costs increase above the base year amount in any subsequent period, the tenant is responsible for their pro-rata share of that increase.

Think of it this way: the landlord is saying, “I’ll cover what I was paying when we made this deal — but if costs go up from there, we share that together.”

CAM/CAOE has no base year — tenants pay their pro-rata share of actual expenses each calendar year. Property tax and property insurance each have a defined base year. Property tax uses a July 1–June 30 fiscal year; property insurance uses a September 1–August 31 fiscal year. Both are written directly into the lease.

How It Works for Property Tax

California property taxes are assessed annually by the County Assessor. Trico modifies paragraph 10.1(b) of the AIR CRE lease form to use a July 1–June 30 fiscal year, consistent with the state’s standard property tax year. Trico pays the tax bill directly when it comes due. Tenants are not charged any estimates throughout the year for this expense.

After the close of each fiscal year, we compare the actual tax bill to the base year amount. If it has increased, each tenant is billed their proportionate share of the overage based on their percentage of the property’s total rentable square footage. If the bill came in at or below the base year amount, there is nothing to bill.

Example: If the base year property tax was $40,000 and the current fiscal year’s bill comes in at $46,000, the $6,000 increase is allocated among tenants. A tenant occupying 25% of the property would receive a reconciliation billing of $1,500 for that fiscal year.

How It Works for Property Insurance

Property insurance is handled on the same fiscal year basis, with one important difference from the standard AIR CRE boilerplate. The standard AIR lease form (paragraph 8.1) defines the “Base Premium” as the annual premium for the 12-month period immediately preceding the lease Start Date. Trico modifies this: instead of looking backward 12 months, we use the current fiscal year in which the lease starts as the Base Year for property insurance.

This is a deliberate, tenant-friendly choice. Because the base year is the fiscal year the lease starts in — not the prior year — the new tenant’s baseline is set to the premium already in effect when they move in. The practical result: a tenant is unlikely to receive an insurance reconciliation bill at the end of their first fiscal year, since the premium they’re being compared against is from the same policy period. The one exception is a tenant who starts near the end of a fiscal year — they may see a small reconciliation charge in the second fiscal year, which covers less than 12 months from their lease start date, if the premium increased at renewal. Trico writes the fiscal year designation (9/1–8/31) and the applicable base year directly into the lease at both paragraph 8.1 (or paragraph 1.8 on single-tenant leases).

Trico pays the insurance premium when it’s due. At the close of each fiscal year, we compare the actual premium to the base year premium. If the premium has increased, tenants are billed their pro-rata share of the difference. If it hasn’t increased above base, there is nothing to bill.

California commercial property insurance premiums can move in either direction year to year — and over a multi-year lease, you may see both increases and decreases. When costs go up above your base year amount, you’ll receive a reconciliation billing for your share. When costs come down or hold steady, there’s nothing to bill. Understanding the structure helps you plan for either outcome.

No Estimates in Your Monthly Charges

Property taxes and property insurance are not estimated in your monthly rent or bundled into your ongoing CAOE charges. Trico pays those bills directly when they come due. If the actual cost for a fiscal year exceeds your proportional base year amount, you’ll receive a separate reconciliation billing for your share of the increase.

For property tax and insurance specifically, this keeps things clean and straightforward. You’re billed only if and when there’s a real, documented increase above your base year amount for that fiscal year.

What Tenants Should Watch For

A few things worth understanding before and during your lease:

• Know your base year for taxes and insurance. CAM/CAOE has no base year — it’s reconciled on actual expenses each calendar year. Property tax uses a fiscal year (7/1–6/30) base, aligned with the California property tax year. Property insurance also uses a fiscal year base, set to the fiscal year in which your lease starts — a tenant-friendly approach that means you’re unlikely to receive an insurance reconciliation bill in your first year. The base year for taxes and insurance should be clearly written into your lease.
• Ask what current costs look like at signing. If taxes or premiums have already risen since the building was last leased, your exposure starts higher than the base year amount might suggest.
• Review reconciliation statements when they arrive. Trico provides a reasonably detailed statement showing the base year amount, the current year amount, and your pro-rata share of any increase. If you have questions about the numbers, call us — we’re happy to walk through any statement with you.
• Understand your pro-rata share. How is the building’s total rentable area defined, and are common areas included or excluded from that denominator?
• Plan for the long term. Property taxes generally trend upward over time — the main exception being a successful assessment appeal by the landlord, which can reduce the bill but isn’t a regular occurrence. Insurance premiums are more variable and can move in either direction year to year. Either way, understanding the base year structure before you sign a multi-year lease puts you in a much better position to budget accurately.

Our Approach at Trico

We’ve structured our reconciliation process to be as straightforward as possible. We modified the standard lease form specifically to define fiscal years and base years clearly — no ambiguity about what period is being measured or what the baseline is.

Before you execute a lease with us, we’re happy to walk through the base year provisions, explain current cost levels for the building, and give you a realistic picture of potential exposure over your term. And if you’re already in a Trico lease and have questions about a reconciliation statement, call us. We’ll go through it with you.

That’s the kind of relationship we’re in the business of building.

Trico Realty, Inc. | 3100 Pullman St., Suite A, Costa Mesa, CA 92626 | 714.751.4420 | tricorealty.com

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