Grossing Up Your Expenses
What do you mean, gross up?
This is an expression which you probably heard from your broker or attorney but may have no clue what they are referring to. First of all, it refers to how a landlord calculates the operating expenses on your building which in turn affects your pro-rata costs.
Simple explanation...we think
Let's say you're in an office building that is 75% occupied. Based on that usage, the cost of operating the building is for this example, $8.20 per square foot. On the other hand, if the building were 96% occupied, it might cost the landlord $8.44 PSF to maintain and operate the building. So what? Isn't that part of your rent? Well, sort of...
No it's time to get complicated. Hold on!!!!
It is important to always compare apples to apples. A 75% building is not the same as a 96% building when it comes to operating costs. For example, if your first year in the building, the operating costs based on 75% occupancy was $8.20 PSF, that $8.20 could be established as your "base year." Should the costs go up in year two, you would typically, in a full service gross lease, be responsible for the difference between your base year and the second year costs. In the case above, that amount would be $.24 PSF or $.02 PSF per month.
But wait!!!! A 75% building SHOULD cost less than a 96% building. Now you're on the right track. What if the landlord hypothetically grossed up the expenses on the 75% building "as if" it were 96%? The grossed up costs might then be $8.32 PSF and your second year difference would be....
Now you're getting it.