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Realogic Blog

clf-gross-upFollowing up on the previous post about Caps on Operating Expenses, today's post is all abut the often misunderstood concept called Grossing Up or simply Gross Up. The Gross-Up of operating expenses is a critical mechanism that allows landlords to equitably allocate operating expenses that are variable in nature. Specifically, the operating expenses that vary as a result of occupancy are increased to an amount that have been incurred if a defined level of occupancy were achieved.

In a typical gross-up scenario, the level to which a landlord may artificially increase variable expenses due to a gross-up clause is 95% or 100% (also known as full occupancy).

While this may seem like an unfair method for the landlord to artificially inflate expenses and overcharge a tenant, the goal of a well drafted gross up clause is to protect both parties from dramatic swings in recoverable operating expenses.

Gross Up - Illustrated

Imagine a building with one tenant occupying 50% of the building. The Landlord pays $100,000 in Variable Expenses (such as Janitorial Services). Now, only the occupied portion of the building receives the services which make up Variable Expenses. 

gross-up-actual-occupancy

If the one tenant paid their pro rata share of operating expenses, they would only be responsible for $50,000 of the cost, despite being the sole tenant.

gross-up-50-percent-paid

Now, that doesn't seem fair, does it?

That's why the gross-up clause often will take any occupancy below 95% as if the building were 95% occupied (or fully occupied, as the lease may read).

In our example, the one tenant occupying 50% of the building would pay $95,000 (representing the 95%) while the landlord would absorb the remaining $5,000. 

gross-up-95-percent

For more elaborate examples of gross-up, grab the brief e-book beneath this post. Be sure to return to the Realogic blog again next week where we'll discuss the retail-specific additional rent known as Percentage Rent. 

Miles avatar

Miles Baltrusaitis

Miles is a multi-instumentalist for Realogic Analytics, where he works in Marketing & Sales but ultimately concentrates on client services. Miles also has extensive experience in Lease Abstracting and Lease Administration from both the tenant and landlord perspective.

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