A gross-up provision adjusts a building’s variable operating expenses to reflect a higher, assumed level of occupancy. When a property is partially vacant, occupancy-driven costs (like janitorial or utilities for occupied suites) are lower than they would be at full occupancy. Without a gross-up, the few tenants in the building would under-recover those costs, and the landlord would absorb expense for vacant space. Grossing up expenses to a stated occupancy — commonly 95% or 100% — makes recoveries consistent regardless of how full the building is.
Why gross-up exists
Gross-up protects both sides from distortion caused by vacancy:
- Only variable, occupancy-driven expenses are grossed up — not fixed costs like taxes or insurance
- It prevents existing tenants from under-recovering shared variable costs
- It keeps a tenant’s per-square-foot recovery stable as occupancy changes
How it is applied
The landlord identifies variable expenses, then scales them to the gross-up occupancy before applying each tenant’s pro-rata share. The provision and the target occupancy percentage are defined in the lease.
A building is 80% occupied and incurs $80,000 of variable janitorial expense. With a 95% gross-up, the expense is scaled to roughly $95,000 (the level expected at 95% occupancy) before being allocated to tenants by their pro-rata share.