Gross-ups

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“If the Building is less than fully occupied, all Operating Expenses which vary directly with changes in occupancy shall be ‘grossed-up’ by Landlord as if the Building had been 95% occupied during the year in question.  Landlord shall not recover more than 100% of the Operating Expenses actually incurred for such year.”

• Fixed
• Variable
• Semi-variable

Fixed expenses do not vary in correlation to any changes in the occupancy of a building.

Variable expenses have a direct correlation to any changes in the occupancy of a building..

Semi-variable expenses are partially fixed and partially variable.

For example, if the scope of a janitorial contract is written in a way for the lobby and common areas of the building to be cleaned in addition to the tenant suites, the cost to clean the lobby and common areas will be fixed throughout the term of the contract at the rate billed by the vendor.  In contrast, the cost to clean the tenant suites will vary as occupancy increases or decreases.

Many janitorial contracts are based on a rate per square foot; however, the square footage used in the calculation may not be rentable square feet.  Useable or “cleanable” square footage may be used in place of rentable square feet.

Besides cleaning, expenses for cleaning supplies, trash removal, utilities and management fees are typically grossed-up.  However, cases can  be made for payroll, elevator maintenance and real estate taxes to be grossed-up.

What would the vendor have billed if the building was 95% occupied?  This is what the grossed-up expense should total.

Gross-up calculations for buildings recently placed in service or in a lease-up stage are the most challenging to perform.  Special attention must be paid to estimating what the grossed-up expenses should be.  Setting the initial level of these grossed-up expenses is very important, especially when they relate to caps on controllable expenses.