Gross-up clauses, explained with the arithmetic

A gross-up clause lets the landlord restate the operating expenses that vary with occupancy as if the building had been occupied to a stated level — most often 95% or 100% — before allocating them to tenants. The arithmetic is a single ratio: the variable expense actually incurred, multiplied by the stated occupancy divided by the actual occupancy. At Harbor Point Plaza, 80% occupied in 2026 with $400,000 of variable expense, the gross-up to 95% is $400,000 × (95 ÷ 80) = $475,000. The fixed expenses, $600,000, are not touched, and the pool goes from $1,000,000 to $1,075,000.

The clause exists for two reasons that point in opposite directions, which is why both landlords and tenants ask for it. For the landlord, it means a tenant in a partly empty building pays the full cost of the services it actually receives: cleaning a tenant’s suite costs the same whether the suite next door is occupied or not, and without a gross-up the landlord absorbs the share of that cleaning that would have been allocated to empty space. For the tenant on a base-year lease, it means the base year is not artificially low: if the base year was lightly occupied and never grossed up, every later year’s increase includes the cost of the building filling up, and the tenant pays for occupancy growth as if it were cost growth, every year for the rest of the term.

The rest of this post goes through which expenses are grossed up and which must not be, the formula and the worked example, the base-year trap with numbers, the mistake of grossing up the whole pool, the choice between per-expense and pool-level methods, what the lease should say, and how to document the adjustment on the statement.

Variable and fixed

The test for whether an expense is grossed up is a question about the expense, not about its name: if the building went from 80% occupied to 95% occupied, would this cost have gone up? If yes, it varies with occupancy and the gross-up applies. If no, it is fixed, and grossing it up creates expense that was never incurred. Practitioner sources agree on the broad categories and disagree at the edges, and the lease’s own list, where it has one, controls.

Two of the rows deserve a note. Utilities are the account most often grossed up in full when only part of them should be; one presentation at a BOMA International conference described a market practice of treating roughly a third of electricity as fixed and grossing up the remainder, though there is no published standard and the figure is a practitioner estimate rather than a rule. Management fees are grossed up under some leases because a fee computed as a percentage of collected rent falls when the building empties, and left alone under others because the lease caps the fee or excludes it from the gross-up by name. The lease decides; where it lists the categories, use its list, and where it does not, classify by the test above and record the classification.

The formula

Grossed-up expense = actual variable expense × (stated occupancy ÷ actual occupancy), applied only when actual occupancy is below the stated level. If the building is 97% occupied and the lease says 95%, there is no gross-up and the actual figure is used; a gross-up never reduces an expense below what was spent, unless the lease is written unusually.

Actual occupancy should be the weighted average over the year, by month, of occupied rentable area, not the occupancy on the last day. A building that was 75% occupied for eight months and 90% for four was 80% occupied for the year, and that is the figure that goes in the denominator.

Harbor Point Plaza, 2026, 100,000 rentable square feet, 80% average occupancy, gross-up to 95%:

The ratio 95 ÷ 80 is 1.1875, so the variable expense rises by 18.75%, or $75,000. On an 8.00% share — Brightleaf Yoga, Suite 210, 8,000 RSF — the gross-up adds $6,000 to the tenant’s gross share, from $80,000 to $86,000. That $6,000 is the cost of cleaning, lighting and emptying the bins for Brightleaf’s own suite that would otherwise have been spread over the empty 20% of the building and absorbed by the landlord.

The base-year trap

A base-year lease charges the tenant its share of the increase in operating expenses over the base year. If the comparison year is grossed up and the base year is not, the increase includes the gross-up itself, and the tenant pays it every year.

Brightleaf’s base year is 2023, and its base-year share is $74,000. That figure was produced by grossing up 2023 the same way as 2026. Suppose 2023 looked like this: fixed expenses $540,000, variable expenses actually incurred $308,000 at an average occupancy of 76%. Grossed up to 95%: $308,000 × (95 ÷ 76) = $385,000. Base-year pool $925,000, and 8.00% of that is $74,000.

Now compute the same lease three ways.

The first two rows are close to each other, differing by $160 because occupancy moved from 76% to 80% between the years. The third row is $6,160 higher than the first, and nothing about the building’s costs changed between rows one and three — only the method. That $6,160 recurs every year of the term, because the base year is fixed. Over a seven-year lease it is $43,120 charged for a difference in arithmetic, and it is the figure a tenant’s auditor looks for first.

The rule that follows is symmetry: whatever is done to the comparison year is done to the base year, with the same stated occupancy, the same list of variable accounts and the same method. If the base year was reconciled before the gross-up policy was decided, it has to be restated under the policy before it can be used, and the restated figure, with its working, is kept with the lease. Base year versus expense stop covers why the base year has to be retained on the same basis as the current year in every other respect too.

The mistake of grossing up the whole pool

The most common error on a statement is applying the ratio to the total pool rather than to the variable part of it. At Harbor Point:

The difference, $112,500, is expense nobody incurred: the insurance premium did not rise because more suites were cleaned, and the landscaping contract was for the same grounds. On Brightleaf’s 8.00% share that is $9,000 in one year, and across six tenants it is the full $112,500 billed to someone. It is also easy to find, because a tenant’s auditor will ask for the gross-up worksheet and the worksheet will show a single factor applied to the total. A gross-up that cannot be shown account by account is a gross-up that will be disputed.

Per-expense or pool-level

There are two ways to run the calculation, and the lease, where it addresses the point, decides between them.

The pool-level method classifies each account as variable or fixed, totals the variable accounts, and applies one ratio to the total. That is the Harbor Point example above, and it is adequate when every variable account moves with occupancy in roughly the same way.

The per-expense method applies the ratio account by account, which allows different treatment where it is warranted: the tenant-driven portion of electricity grossed up and the common-area portion left alone, janitorial grossed up on contracted area rather than on the occupancy ratio, management fees grossed up on lost rent rather than on the occupancy ratio. It is more defensible and more work, and it produces a worksheet with one row per account rather than one row for the pool. Where the lease uses words like “each component of operating expenses that varies with occupancy”, it is describing the per-expense method, and a pool-level calculation may not match it.

Either way, the output is the same shape: for each account, the actual amount, whether it was grossed up, the factor applied, and the grossed-up amount. If the statement cannot produce that table the method was not really applied; it was approximated.

What the lease should say, and what to do when it is silent

A clause that avoids most disputes states five things: that operating expenses which vary with occupancy may be adjusted to reflect a stated occupancy; what that occupancy is; that the adjustment applies equally to the base year, if there is one; which categories are treated as variable, or at least the test for deciding; and that the tenant may inspect the occupancy figure and the calculation. The stated occupancy is the most negotiated of these. Practitioner sources describe 95% as common for multi-tenant office with a base year, on the basis that some vacancy is normal, and 100% as the figure in many model forms; a 100% gross-up in a base year favors the tenant, because it sets the highest possible base, and a 95% gross-up in a lease with no base year makes little sense for the landlord, who then absorbs the last 5% of variable cost in a full building.

When the lease is silent, there is no gross-up. The clause is a right the lease grants, not a convention the industry assumes, and an owner who grosses up without the clause is billing expense the tenant did not agree to share. The practical course for an owner with a mix of leases — some with the clause, some without — is to run the reconciliation twice in the relevant respect: a grossed-up pool for the leases that provide for it and an actual pool for those that do not, with each tenant’s share taken from the pool its lease describes. That is a recovery-group question as much as a gross-up one, and it is a reason the clause, its stated occupancy and its variable list belong on the lease record rather than in the reconciliation workbook.

Documenting the gross-up on the statement

The statement should let the tenant reproduce the adjustment without asking. That means a section, after the exclusions and before the shares, showing the actual average occupancy for the year and how it was measured, the stated occupancy from the lease, the factor, and then a table of the variable accounts with actual and grossed-up amounts and a line confirming that the fixed accounts were not adjusted. For a base-year tenant, the same table for the base year, or a reference to the retained base-year schedule, sits beside it. The sample statement shows one layout, and the calculator will run the ratio on your own figures.

The reason to show it this way is not transparency for its own sake. A tenant auditor requesting the gross-up schedule asks for exactly those elements — which lines were grossed up, the actual occupancy used, the target, and the per-line adjustment — and a statement that already contains them turns the audit request into a reference to page two.

What makes the next one easier

The gross-up has three stable inputs and one annual one. The stated occupancy, the variable list and the method come from the lease and do not change between years; the only new figure is the year’s average occupancy. Recorded once, the calculation is a re-run. Where the reconciliation is done in Ledgerstone, the gross-up — stated occupancy, variable classification and base-year treatment — lives on the lease with the other recovery rules, and the reconciliation shows the derivation behind every figure, so the account-by-account worksheet above exists before anyone asks for it. The classification of each account as variable or fixed is also what the chart of accounts can carry, and the setup post covers that side.

Related reading

• What a CAM reconciliation actually involves — where the gross-up sits in the full sequence.
• Base year and expense stop are not the same thing — the structure the base-year trap belongs to.
• The CAM reconciliation checklist — the occupancy confirmation and gross-up steps on the calendar.
• A QuickBooks Online setup for CAM recovery — keeping variable and fixed accounts apart in the books.