Rent & Operating Costs
Gross-up provision
Also called: gross up clause, occupancy adjustment
A gross-up provision adjusts a building's variable operating expenses to what they would have been at a stated occupancy level, commonly 95 percent, before the tenant's share is calculated. It protects both parties in a partially occupied building, and it is one of the few operating expense clauses that genuinely cuts both ways.
Gross up sounds like a landlord device and is often treated as one in negotiation, but in a base year lease it is usually the tenant that needs it most.
The mechanic
Some operating costs vary with occupancy: janitorial, utilities in occupied suites, trash removal. Others do not: taxes, insurance, landscaping, structural maintenance. A gross up clause takes only the variable category and scales it up to a stated occupancy, typically 95 percent, as if the building were nearly full.
Why a tenant wants it in a base year lease
Consider a building 60 percent occupied in the base year that reaches 95 percent by year three. Without gross up, the base year captures janitorial costs for 60 percent of the building, while year three costs reflect 95 percent. The tenant pays escalations on the difference even though its own consumption never changed. Gross up restores the comparison by stating both years at the same occupancy.
Where the clause goes wrong
- Gross up applied to fixed costs. Taxes and insurance do not vary with occupancy. Grossing them up inflates the tenant's share for no defensible reason. The clause should be limited to expenses that actually vary with occupancy, and the lease should say so.
- Asymmetric application. Some drafts gross up the comparison year but not the base year. That is the worst outcome for a tenant and it appears often enough to be worth checking every time.
- An occupancy level above 100 percent, or a level like 100 percent that overstates realistic operation.
What to look for in a redline
Because the clause is short and technical, changes to it are easy to skim past. The words to check in every round are the occupancy percentage, whether the clause names the base year explicitly, and whether the list of grossed up expenses is limited to variable costs. A change from "variable Operating Expenses" to "Operating Expenses" is four characters and a meaningful amount of money.
Catch this clause when it changes
CRE Redline pulls every tracked change out of each redline round, ranks it by how much it moves, and keeps contested clauses visible from round to round. Round 1 of every deal is free.
Analyze your first round freeRelated terms
A base year is the calendar year whose operating expenses are built into a tenant's base rent, so the tenant pays only its share of increases above that year's costs.
CAM charges are the tenant's proportionate share of the cost of operating and maintaining a property's shared areas, billed monthly as an estimate and trued up against actual spend after the year closes.
A CAM reconciliation is the annual statement in which a landlord compares the estimated common area maintenance payments a tenant made during the year against the property's actual operating costs, then bills or credits the difference.
An operating expense cap limits how much a tenant's share of operating costs can rise year over year, typically stated as a percentage such as 5 percent.
This page is general information, not legal advice. Review lease language with qualified counsel.