Definition
A Gross-Up is a lease provision that adjusts certain operating expenses to reflect a stabilized occupancy level, typically 95% or 100% leased, even if the building is partially vacant.
In simple terms: expenses are calculated as if the building were fully occupied, so tenants pay their fair share.
Why Gross-Up Is Needed
Some expenses—such as utilities, janitorial services, and management— vary with occupancy. If a building is only 50% leased, actual expenses may be artificially low.
Without a gross-up, tenants signing later leases could benefit from an unrealistically low base year expense level.
Example
- Building size: 100,000 SF
- Occupancy: 50%
- Actual utility costs: $200,000
If utilities would normally be $350,000 at 95% occupancy, the landlord may “gross up†expenses to reflect $350,000 for reimbursement and base year calculations.
Where Gross-Up Is Common
- Full Service Gross (FSG) Leases
- Office buildings with base year stops
- CAM expense calculations
How Gross-Up Works in Base Year Leases
In leases with an expense stop, the base year operating expenses are used as the benchmark.
If base year expenses are not grossed up, future reimbursements may be artificially low, reducing landlord recovery.
Expenses Typically Subject to Gross-Up
- Utilities
- Janitorial services
- Management fees
- Security services
Fixed expenses like property taxes and insurance are generally not grossed up.
Gross-Up and NOI
- Protects future NOI stability.
- Prevents under-recovery of expenses.
- Improves accuracy in underwriting.
Risks and Controversies
- Tenant disputes over methodology.
- Over-aggressive gross-up assumptions.
- Lack of transparency in calculations.
- Misalignment between lease language and accounting practice.
Investor Considerations
- Confirm gross-up clauses exist in leases.
- Review historical occupancy levels.
- Verify consistency in base year calculations.
- Assess impact on tenant reimbursements.
- Ensure underwriting reflects stabilized expense assumptions.
Gross-Up vs. Expense Stop
- Gross-Up: Adjusts expenses to stabilized occupancy.
- Expense Stop: Sets the baseline for tenant reimbursement.
Gross-up affects how the baseline is calculated; expense stops determine when reimbursements begin.
Investor Checklist
- Review lease language for gross-up percentage (95% or 100%).
- Confirm which expenses are eligible for adjustment.
- Compare actual vs. stabilized expense assumptions.
- Ensure consistency across tenant leases.
- Stress-test vacancy scenarios.