What is a gross-up provision and why should you care?
For context, this came up today in a marathon round with counsel, landlord and tenant. We are negotiating a lease with a publicly traded company and a local owner. These conversations are steeped in minutia but are typically educational.
In a “triple net lease,” all of the landlord’s operating expenses are passed on to the tenant. A lease may, however, contain an “expense stop” that establishes a point at which expenses begin to be passed on to the tenant. In this type of lease, expenses for a “base year” are determined – the expense stop. Thereafter, the landlord pays expenses equal to the base year and the tenant pays its pro-rata share of the rest.
Under this set of facts, a $1,000 expense to the landlord would be multiplied by a gross-up factor of two / 50% ). $1,000 x 2=$2,000 . The tenant is required to pay a pro-rata share based on the percentage of space it occupies – let’s assume 20%. In this scenario, the tenant’s total grossed-up obligation would be $400.
Sometimes a seller passes along a vault of information which makes review and approval a snap. Other times, this becomes the buyer’s responsibility. Third-party reports such as environmental, building inspection, seismic, ALTA survey, zoning report, etc. must be ordered, completed, reviewed and approved.
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