What to Look for in Grossing Up
Hidden Tricks that Could Cost You
OK, the lease is signed and you file it under "Don't Need That Anymore." After all, the hard part is over. Your broker identified a space, negotiated a great rate, and got you some tenant improvement and parking concessions--- what else is there? Well there's lots! Now is the time to administer that lease. Hopefully you, your lawyer, and ESPECIALLY your broker looked at the hidden costs that could cost you more than you thought. The major hidden expense is building operating expense pass throughs.
What needs to be Grossed Up and Why
In another chapter we answered the WHY question. Now we need to deal with the WHAT. Simply, in addressing the grossing up of the building operating expenses we refer to the items that can be affected by the fact that more or fewer people occupy your building. Take out your last landlord reconciliation statement. If you never got one or aren't sure what is, drop us an e-mail at jerry@inhousecorp.com and we'll walk you through it.
As you check the items on the statement, certain things should pop out at you as obvious. If there's more people in the building there will be more demand on a certain item. The easiest one to look at is the electricity use. If the building is less occupied then there should be less demand. If the cost of electricity is $700,000 in a building that is 75% occupied, what should the cost of electricity be if the building is 95% occupied. Don't you appreciate Ms. Jones seventh grade math class now?
But wait! What if one tenant uses more electricity than normal? We saw one building where a tenant on the first floor had the rights to a big clock/temperature sign on the roof. Did the Landlord separate that out? Let's get back on track... Janitorial... supplies... management fee... Stop. How does occupancy effect management fee? You can see where the gross up cost t can become a black hole.
Bottom line33 is anything that could be impacted by the percentage the building is occupied needs to be grossed up.
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