How is a "gross up" related to leasing?

A "gross up" in the context of leasing refers to a method used to determine operating expenses that assumes a property is fully occupied, regardless of its current occupancy status. This approach is particularly important in commercial real estate because it provides a consistent basis for calculating costs that tenants might be responsible for, such as utilities and maintenance.

When a building is not fully leased, operating expenses may decrease as fewer tenants share the costs. However, to ensure fairness and consistency in expense allocations among tenants, the gross-up method adjusts these expenses as if the building were fully occupied. This means that landlords project and allocate costs in a way that reflects the total expenses that would typically occur if all spaces were occupied, thereby providing a clearer picture of the operating costs to all tenants.

In this way, the gross-up ensures that tenants are not unfairly penalized for being in a partially occupied building while also helping landlords maintain a stable budgeting approach. This is particularly relevant in lease negotiations and in the structuring of how operating expenses will be divided among tenants in multi-tenant buildings.