What to Look for in Grossing Up
Hidden Tricks Could Cost You
OK, let’s 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 a lot. Now is the time to administer that lease. Hopefully you, your lawyer, and especially your broker looked at the hidden costs that could add up to a price that’s much higher than you originally thought. The major hidden cost is building operating expense pass throughs.
What Needs to be Grossed Up
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 it is, drop us an e-mail at email@example.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're more people in the building, there will be more demand on certain items. 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?
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? The essential question here is, how does occupancy affect the management fee? Obviously, you can see where the gross up costs can become a black hole.
The bottom line is anything that could be impacted by the percentage the building is occupied needs to be grossed up.