breakdown of gross up provision

The Gross Up Provision: A Breakdown

This is a general introduction into the gross up provision within commercial leases. What is the gross up provision? The gross up provision is basically a clause that allows landlords to recover some of the operating costs they would be getting from vacant units, from existing tenants.

Typically, in buildings with multi tenants the landlord divides the operating, maintenance, and utilities utility costs (“Variable Cost”) amongst the occupants.  This division is usually based on each tenant’s proportionate share of the building area. Assuming a fully-leased building (i.e., 100% occupancy) the respective share of the Variable Cost paid by each tenant covers the entire amount.  The same is not true during vacancy periods.  Tables 1 through 3 below illustrate this point.  In general, leases without a grossed-up provision burdens the landlord into paying deficiencies in the Variable Cost.

No Gross Up Provision

Table 1


| Occupancy | Total Variable Cost | Tenant 1 (Occupies   25% of Building) | Tenant 2 (Occupies   25% of Building) | Tenant 3 (Occupies   25% of Building) | Tenant 4 (Occupies   25% of Building) | Total Paid by   Tenants | Landlord Pays |
100% $100.00 $25.00 (100*.25) $25.00 (100*.25) $25.00 (100*.25) $25.00 (100*.25) $100.00 $0.00

Table 2


| Occupancy
| Total Variable Cost
| Tenant 1 (Occupies 25% of Building)
| Tenant 2 (Occupies 25% of Building)
| VACANT
| VACANT
| Total Paid by Tenants
| Landlord Pays
50%
$50.00
$12.50 (50*.25)
$12.50 (50*.25)
$25.00
$25.00

With Gross Up Provision

In a rental market known for its fluctuations, vacancies are not that uncommon.  Thus, to avoid having to pay for deficiencies in the variable cost landlords include a “gross up” provision in their leases.  This way landlords are able to “gross up” the Variable Cost to a negotiated occupancy rate – usually 95% or 100%.  As Table 3 illustrates below, with a grossed-up provision in place landlords pass most if not all of the Variable Cost to the tenants during periods of vacancies.

Table 3


| Occupancy
| Total Variable Cost
| Tenant 1  (Occupies 25% of Building)
| Tenant 2 (Occupies 25% of Building)
| VACANT
| VACANT
| Total Paid by Tenants
| Landlord Pays |
50%|
$100.00 ¹
$25.00 (100*.25)
$25.00
(100*.25)
$50.00
$0.00

¹
 Grossed up assuming a 100% occupancy (See Table 1). In other words, at 50% occupancy the actual Variable Cost is only $50.00 (Table 2). However, this is grossed up to $100.00 in Table 3.

Table 3 grosses up the $50.00 Variable Cost the two tenants produced from its operations to $100.00 (again, $100.00 assumes a 100% vacancy – See Table 1).  The result is that the landlord recovers the $50.00 total Variable Cost the tenants produced.

Because many of these multi-tenant leases include a gross up provision, it is important that they only account for those costs that actually vary by rates of occupancy—e.g., electricity, utilities, trash removal, management fees, and janitorial services. Fixed costs that have nothing to do with changes in occupancy, such as taxes and insurance, must not be considered.

Our real estate attorneys at Schorr Law have a great deal of experience with real estate matters and disputes. Contact us today to set up a consultation!

Text: (323) 487-7533 | Call: (310) 954-1877 | Email: info@schorr-law.com | Use our Contact Form.

By Randy Aguirre, esq.

See related: Commercial Lease Indemnity Provisions

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