Grossing Up Your Expenses
What do you mean, gross up?
This is an expression which you’ve probably heard from your broker or attorney, but may have no clue what it refers to. First of all, it refers to the way a landlord calculates the operating expenses on your building. However they calculate those expenses in turn impacts 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, say, $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.
Now it's time to get complicated. It is important to always compare apples to apples. A 75% occupied building is not the same as a 96% occupied building when it comes to operating costs. For example, if during your first year in the building, the operating costs based on 75% occupancy were $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, that is) be responsible for the difference between your base year costs and the second year costs. In the case above, that amount would be $.24 PSF or $.02 PSF per month.
But wait—a 75% occupied building should cost less than a 96% occupied building. Now you're on the right track. What if the landlord hypothetically grossed up the expenses on the 75% occupied building "as if" it were a 96% occupied building? The grossed up costs might then be $8.32 PSF and your second year difference would be significant.
Now you're getting it.