Gross-Up Clause
How gross-up provisions adjust operating expenses to reflect full-occupancy levels, protecting landlord cost recovery when vacancy exists.
Model Lease Language Variations
“Landlord shall adjust Variable Operating Expenses to reflect ninety-five percent (95%) occupancy of the Building, regardless of actual occupancy levels.”
Allows landlord to gross up to 95% occupancy. Variable expenses only: fixed costs like property taxes are passed through at actuals.
“If the Building is less than ninety-five percent (95%) occupied during any calendar year, Landlord shall adjust those Operating Expenses that vary with occupancy to reflect the Operating Expenses that would have been incurred had the Building been ninety-five percent (95%) occupied.”
Standard market provision. Only variable expenses adjusted. 95% threshold is industry norm.
“Landlord may adjust variable Operating Expenses to the lesser of (i) ninety percent (90%) occupancy or (ii) actual occupancy plus five percent (5%).”
Caps gross-up at 90% and limits adjustment to 5 points above actual. More restrictive for landlord.
Calculation Methodology
1. Separate expenses into fixed (taxes, insurance) and variable (janitorial, utilities, management fees). 2. Calculate actual occupancy as occupied SF / total rentable SF. 3. If actual occupancy < threshold (typically 95%), divide variable expenses by actual occupancy rate to get grossed-up amount. 4. Cap at threshold amount (don't gross up beyond 95%). 5. Add fixed expenses at actuals.
Common Drafting Errors
Failing to define which expenses are 'variable': leads to disputes over whether management fees, insurance, or taxes should be grossed up
Omitting the occupancy threshold: without a cap, landlord could theoretically gross up to 100%
Using 'occupied' without defining whether it means 'physically occupied' or 'leased': a signed lease with no tenant moved in creates ambiguity
Relevant Case Law
Landlord grossed up both variable and fixed expenses. Court ruled lease limited gross-up to variable operating expenses, resulting in $47K tenant recovery.
Billing System Implications (Yardi / MRI)
In Yardi Voyager, gross-up is configured per recovery pool. Common error: applying gross-up to the entire pool instead of only variable expense categories. In MRI, gross-up settings are in the Recovery Analysis module: verify that fixed expense codes are excluded from the adjustment.
Reconciliation Controls for This Clause
Treat the clause as a calculation control, not just legal text. Before issuing statements, translate it into fields your billing system can test consistently.
- Capture the effective dates, tenant scope, and expense categories governed by the clause.
- Document whether the clause applies before or after gross-up, caps, and exclusions.
- Map the clause to the recovery pool, charge code, or manual adjustment field used in the ERP.
- Store the source lease section with the reconciliation support package.
- Test one tenant statement by hand when the clause changes during the year.
CapVeri Analysis
The gross-up clause is the single highest-risk provision for billing errors. CapVeri's detection engine specifically identifies cases where fixed costs (taxes, insurance) have been improperly grossed up.
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