The Art of Grossing Up: Why Variable Operating Expenses Are Rarely 100% Variable
The 20% phone call
Grossing up variable operating expenses is not a math problem. It is a judgment call, and too many reconciliations treat it as simple division.
At National Lease Advisors, we regularly ask property managers and their accounting teams a simple question: why did operating expenses go up 20% or more this year? Far too often, the answer is the same. A large tenant left, occupancy dropped, and the building “had to gross up.”
Dig a little deeper and the method is usually the same too. If the building was 50% occupied, the variable expenses were doubled, and the result was presented as the cost of running the building at 100% occupancy. It looks precise. It is almost always wrong, and the tenants who stayed end up paying for it.
What a gross-up is supposed to do
A gross-up clause exists to make expense recovery fair, not to make it bigger. It adjusts expenses that vary with occupancy to what they would reasonably have been if the building were fully (or 95%) occupied.
The logic is sound. When a building is partially vacant, variable costs fall, and each tenant’s share of the actual expense pool is understated. Without a gross-up, a tenant with a base year set during low occupancy would see artificial increases once the building leases up. The gross-up levels the playing field so tenants pay for the building as it is meant to operate.
The key word in nearly every lease is variable. Only the portion of an expense that actually moves with occupancy should be adjusted. Everything else is already being incurred at full cost and should be left alone.
The myth of the 100% variable expense
Very few operating expenses are 100% variable. Doubling an expense at 50% occupancy assumes every dollar of it disappears with every vacant square foot, and that is rarely true.
The cleanest example of a truly variable expense is the property management fee, when it is calculated as a percentage of collected revenue. Revenue falls with vacancy, the fee falls with it, and grossing it up to full occupancy is reasonable.
Almost everything else on the “variable” list, janitorial and utilities above all, is a blend. Each has a fixed base that runs regardless of occupancy and a smaller variable layer that tracks tenant use. The fixed part is not always easy to see on a general ledger. Finding it takes common sense and knowledge of how the building actually runs, not a formula.
Janitorial: add the vacant space, don’t double the bill
The right way to gross up janitorial is to price the vacant square footage, not to multiply the total. The janitorial contract usually tells you exactly how.
Consider what the cleaning crew does every night. They clean the main lobby, elevator cabs, corridors, common restrooms, and stairwells. None of that work changes when half a floor is vacant. The restrooms on a half-empty floor still get cleaned; the lobby still gets vacuumed and polished.
What does change is the cleaning inside tenant suites. So the adjustment should be:
- Pull the janitorial contract and find the rate for tenant-space cleaning, usually a cost per rentable or usable square foot.
- Multiply that rate by the vacant square footage.
- Add the result to the actual janitorial cost.
That number is a defensible estimate of full-occupancy janitorial. Doubling the entire invoice charges tenants a second time for common areas that were already cleaned at full cost.
Utilities: the building runs whether the suites are full or not
Most of a building’s utility consumption comes from base building systems that do not slow down with vacancy. That makes utilities one of the most over-grossed expenses we see.
Electricity. The largest loads are the central plant (chillers, boilers, cooling towers, pumps), air handlers, elevators, garage and exterior lighting, and common-area lighting. A central plant runs to condition the building, not to serve each occupied suite. Elevators keep moving at 70% occupancy just as they do at 100%.
What actually varies is the load inside occupied suites: convenience outlets, plug loads, and tenant equipment. A building engineer should help the management team estimate what convenience outlets would draw in the vacant space. The honest answer is usually that it is minimal.
Vacant suites are often not “off.” Many buildings keep HVAC and lighting running in vacant space so it shows well to prospective tenants. HVAC in particular is the vast majority of a suite’s energy use. If the vacant suite is already conditioned and lit, most of its full-occupancy cost is already in the actuals, and there is little left to gross up.
Water. The same logic applies. Cooling towers, the central plant, and building equipment drive the majority of water consumption, no matter how often the restrooms are used. Domestic water does vary with headcount, but it is a small slice of the bill.
The practical approach is to separate the base building load from the tenant-driven load, gross up only the tenant-driven piece, and have the building engineer sign off on the split.
History is the best benchmark
The best evidence of what a building costs at full occupancy is what it actually cost when it was full. If a building drops from 95% or 100% occupied to 75%, the prior fully occupied years should carry the most weight.
Start with those actual costs and adjust them for reasonable, documentable changes: inflation, new utility rates, contract escalations, or real changes in scope. If last year’s fully occupied janitorial cost was $1.00 per square foot, a grossed-up figure of $1.40 this year needs a far better explanation than “we lost a tenant.”
A grossed-up number that lands well above the building’s own fully occupied history is a red flag. It usually means fixed costs were grossed up as if they were variable.
A simple illustration
In this hypothetical, doubling the variable pool overstates full-occupancy cost by $570,000, or 47%. The building is 200,000 square feet and 50% occupied.
| Expense | Actual at 50% | “Double it” | Thoughtful gross-up | How the thoughtful figure is built |
|---|---|---|---|---|
| Management fee | $150,000 | $300,000 | $300,000 | Truly variable; fee follows revenue |
| Janitorial | $240,000 | $480,000 | $360,000 | Common areas unchanged; add 100,000 vacant SF × $1.20/SF suite rate |
| Electricity | $500,000 | $1,000,000 | $550,000 | Base building and vacant-suite HVAC/lighting already in actuals; add plug load of 100,000 SF × $0.50/SF |
| Total | $890,000 | $1,780,000 | $1,210,000 |
The figures are illustrative, but the pattern is the one we see in real reconciliations: the naive method roughly doubles the bill, while a thoughtful one adds only what vacancy actually removed.
A practical checklist
Before a grossed-up reconciliation goes out, property managers and accountants should be able to answer each of these:
- What does the lease say? Confirm the gross-up percentage, which expenses qualify, and whether the lease limits it to costs that vary with occupancy.
- Which part of each expense truly varies? Separate the fixed base from the tenant-driven layer, line by line.
- What do the contracts say? Use janitorial, security, and service contract rates for vacant space instead of multiplying totals.
- What does the engineer say? Get the building engineer’s estimate of base building versus suite-level energy and water use.
- Are vacant suites already running? If HVAC and lights are on in vacant space for marketing, most of that cost is already in the actuals.
- How does it compare with history? Test the grossed-up figure against the building’s own fully occupied years, adjusted for inflation and known changes.
- Can you explain it in one sentence? If an increase of 20% or more is explained only as “vacancy gross-up,” the work is not done.
An art, not a formula
Grossing up is not a simple math solution. It is an art that takes common sense, an understanding of how the building operates, and the experience to know which costs really move with occupancy.
Done well, a gross-up protects both sides: landlords recover what a full building costs to run, and tenants pay their fair share of it. Done by formula, it shifts the cost of vacancy onto the tenants who stayed.
At National Lease Advisors, we review these reconciliations every day. When expenses jump after a vacancy, we ask how the gross-up was built, and we expect an answer grounded in contracts, engineering, and history rather than division. Property managers and accounting teams who do that work up front will find their reconciliations hold up, and their tenant relationships will too.