What does "gross up" mean in real estate?

What does "gross up" mean in real estate?

In commercial leases, "gross up" refers to the adjustment of shared operating expenses, like utilities and maintenance, to reflect what they would be if the building were fully occupied. This practice ensures that tenants pay a fair share of these costs, regardless of the building's actual occupancy level. The specifics of how these expenses are grossed up can vary and are often a point of negotiation in lease agreements.

Here's how the concept is typically used:

  1. Allocation of Operating Expenses: In a commercial lease, tenants may be responsible for a portion of the building's operating expenses (like utilities, maintenance, and property taxes). These expenses are often divided among tenants based on the proportion of the building they occupy.
  2. Gross-Up Clause: A gross-up clause is used when a building is not fully occupied. It allows the landlord to adjust (or "gross up") these operating expenses to reflect what they would have been if the building were fully occupied. This is especially relevant for costs that vary with occupancy, like utilities and janitorial services.
  3. Purpose of Gross-Up: The rationale behind this is that certain expenses would be higher if the building were fully leased. Without grossing up, tenants in a less than fully occupied building would pay a smaller share of these costs, giving them an unfair advantage over tenants in a fully occupied building.
  4. Impact on Tenants: For tenants, this means that their share of operating expenses can increase, even if the actual expenses haven't, simply because the building isn’t fully leased. It's important for tenants to understand how the gross-up clause is calculated and what expenses it applies to.
  5. Negotiation Point: The specifics of how expenses are grossed up can often be a point of negotiation in a lease. Tenants may seek to limit the types of expenses that can be grossed up or how the gross-up is calculated.

Grossing up is a method of adjusting shared operating expenses in a commercial lease to reflect a higher occupancy level, ensuring that tenants pay a fair share of these costs, irrespective of the actual occupancy level of the building.

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