A gross-up provision is a commercial lease clause that restates variable operating expenses as if the building were near full occupancy, typically 95% to 100%. It applies only to costs that move with occupancy, such as utilities and janitorial. The clause keeps each tenant's expense share stable and protects the landlord from absorbing the cost of vacancy.
How Does a Gross-Up Provision Work?
A gross-up provision works by scaling occupancy-variable expenses up to a stated occupancy level before allocating them to tenants. The formula is Grossed-Up Variable Expense = Actual Variable Expense divided by Actual Occupancy, times Gross-Up Occupancy. Fixed expenses are not grossed up. Per AQUILA Commercial and Parr Brown, the gross-up level is commonly set at 95% or 100%.
The clause only touches costs that rise and fall with how full the building is. Per Lowndes and Holland and Hart, variable items include electricity, janitorial, trash removal, and management fees, while fixed items such as property taxes, insurance, and building security stay at actual cost and are never grossed up.
Expense type | Examples | Grossed up? |
Occupancy-variable | Electricity, janitorial, trash, management fees | Yes, scaled to the gross-up occupancy |
Fixed | Property taxes, insurance, building security | No, allocated at actual cost |
Gross-up level | Negotiated floor, commonly 95% to 100% | Sets the target occupancy for the calculation |
The provision matters most in net leases where tenants reimburse operating expenses by pro rata share. Without a gross-up, a half-empty building spreads low variable costs across few tenants, and the landlord eats the vacant space's share. With it, variable costs are restated to a full-building basis so each tenant pays the per-square-foot rate it would pay in a stabilized building.
Why a Gross-Up Provision Matters
A gross-up provision matters because it decides who bears the cost of vacancy in a net-leased building. Correctly drafted, it holds a tenant's per-square-foot expense reimbursement steady as occupancy changes, so a tenant does not see its expense bill swing purely because neighbors moved out or in. Incorrectly applied, it can overcharge tenants or leave a landlord under-recovering.
The clause protects the landlord's expense recovery and the tenant's budget at once. A landlord underwriting a lease-up assumes grossed-up recoveries to avoid absorbing vacant-space costs during fill. A tenant reviewing the clause should confirm that only variable expenses are grossed up and that the gross-up level is capped, because grossing up fixed costs or setting the level above true stabilized occupancy inflates the bill.
The quotable point for an operator: a gross-up provision does not raise total building costs, it reallocates them, so each occupied tenant pays the expense rate of a full building rather than subsidizing empty space.
Example
A 100,000 square foot office building runs at 50% occupancy. Variable operating expenses at that occupancy are $200,000, and fixed expenses are $300,000. The lease grosses up variable expenses to 100% occupancy. A tenant leasing 10,000 square feet holds a 10% pro rata share.
Step | Calculation | Result |
Actual variable expense | Given at 50% occupancy | $200,000 |
Grossed-up variable expense | $200,000 / 0.50 x 1.00 | $400,000 |
Fixed expense | Not grossed up | $300,000 |
Total recoverable expense | $400,000 + $300,000 | $700,000 |
Tenant pro rata share | 10,000 / 100,000 | 10% |
Tenant reimbursement | 10% x $700,000 | $70,000 |
With the gross-up, the tenant reimburses $70,000. Without it, the recoverable pool is the actual $200,000 variable plus $300,000 fixed, or $500,000, and the tenant pays 10%, or $50,000, leaving the landlord to absorb the vacant space's variable cost. The gross-up shifts that $20,000 gap onto the occupancy-based full-building basis the tenant agreed to.
Variations and Edge Cases
A gross-up provision is not a single formula: its result depends on the gross-up level, which expenses are treated as variable, and any base-year interaction. Small drafting choices move real dollars. The table below covers variants an operator should confirm.
Variant | Treatment |
Gross-up level | 100% maximizes recovery; a 95% cap gives the tenant a modest cushion |
Expense classification | Disputes arise over whether items like management fees are variable or fixed |
Base-year lease | Grossing up the base year and later years consistently prevents an inflated pass-through in full-occupancy years |
Over-recovery cap | Some leases bar the landlord from collecting more than actual total expenses across all tenants |
Occupancy definition | Whether occupancy means leased or physically occupied space changes the grossed-up figure |
The common mistake is inconsistent base-year treatment. In a base-year lease, if the base year is not grossed up but later years are, the tenant's expense stop is understated and the pass-through balloons as the building fills, a swing that has nothing to do with rising costs.
Gross-Up Provision vs Common Area Maintenance
A gross-up provision is often confused with common area maintenance, and they operate together. Common area maintenance, or CAM, is the pool of shared operating costs a tenant reimburses. A gross-up provision is the adjustment that restates the occupancy-variable portion of those costs to a near-full-occupancy basis before the tenant's share is calculated.
The two describe different layers. CAM defines what expenses are recoverable and how the pool is split. The gross-up defines how the variable slice of that pool is measured when the building is not full. A tenant can owe CAM with no gross-up, but a gross-up provision has no effect without an expense pool like CAM to adjust.
Frequently Asked Questions
What expenses can be grossed up in a lease?Only occupancy-variable expenses can be grossed up, meaning costs that rise and fall with how full the building is, such as electricity, janitorial, trash removal, and management fees. Fixed expenses like property taxes, insurance, and building security do not vary with occupancy and are allocated at actual cost, never grossed up.
What is a typical gross-up percentage?A typical gross-up level is 95% to 100% occupancy. A 100% gross-up restates variable expenses as if the building were completely full and maximizes the landlord's recovery. A 95% cap leaves a small cushion for the tenant, so tenants often negotiate the lower figure while landlords prefer 100%.
Does a gross-up provision increase a tenant's total cost?A gross-up provision does not raise the building's total operating cost; it reallocates the variable portion so each occupied tenant pays the per-square-foot rate of a full building. In a partly vacant building it can raise a specific tenant's reimbursement, but it prevents that tenant from paying less than a stabilized rate while the landlord absorbs vacant space.
Related Terms
Common Area Maintenance
Net Operating Income
Base Rent
Triple Net Lease
Estoppel Certificate