Can someone explain the benefit of gross ups for tenants?
I've been researching commercial real estate leasing, but am quite new to the entire thing. From my understanding, gross ups protect landlords from paying for OpEx incurred when their real estate is partially vacant.

However, it seems to me that tenants will always draw the short end of the stick and pay the maximum amount regardless of the vacancy state of the building. Surely I've misinterpretted?
[{"id": "hpc1k6z", "text": "Yes they are to protect landlords. There is nothing in it for the tenant but a lot of landlords require them.", "replies": [], "depth": 1}, {"id": "hpc30fh", "text": "No that\u2019s generally correct. The only time I\u2019ve seen benefit for tenants is when they enter lease partially vacant and future years expenses are based on amount over base year. Eg base year is $100 based on 50% occupancy. Then in year 3 it\u2019s 100% full and they now have to pay more over the base year than of the initial year were based on a gross up amount. \n\nThat being said just because it mostly benefits landlords doesn\u2019t mean it doesn\u2019t make sense or isn\u2019t logical.", "replies": [{"id": "hpc4ibc", "text": "Thank you for your answer!\n\nJust to see if I understood correctly: in the case of a gross up agreement, the tenant would pay $200 in the first year and this amount would remain the same over the following two years. Whereas without one, it would be something along the lines of: $100, $150, $200. Is that correct?", "replies": [{"id": "hpc6bgz", "text": "Generally correct. Let\u2019s say normal operations would create an opex bill of $200. But then a major tenant vacates. The landlord now doesn\u2019t have to run certain variable common expenses due to the vacancy like a major elevator, lighting, security etc. So the actual expense goes down to say $150 per your example. But this isn\u2019t due to cheaper opex in general it\u2019s purely due to vacancy. Essentially the reasoning goes that that opex savings should all go to the LL because the LL is bearing the full brunt of the vacancy loss so it should be able to offset some of that loss through the savings rather than tenants share in the savings and thus benefit from vacancy.", "replies": [{"id": "hpc9hev", "text": "Got it! And as u/FreshOj pointed out, the tenant would in turn get a lower base rent due to the type of contract this is. Greatly appreciate everyone chiming in!", "replies": [{"id": "hpcej3d", "text": "Yes though that sort of conflates two things. A NNN lease will have lower base rent (eg $10/ft) vs a modified gross or the like (eg $12/ft). A gross up clause is a provision within a lease type. But parties don\u2019t negotiate lower rent in exchange for a gross up clause. A gross up is just a way of calculating your NNN billbacks buried pretty deep in the meat of the lease.", "replies": [{"id": "hpck9ms", "text": "I understand what your saying here. The numbers I used are more likely to be numbers between a modified gross lease and a triple net lease.\n\nHowever, a gross up clause is definitely an area of negotiation for a tenant to use. Anytime risk is diverted away from the landlord to the tenant (such as a gross up clause in a building that may struggle with vacancy) that is an opportunity to negotiate the base rent down. I just used dollar amounts that are too drastic to illustrate the point.", "replies": [{"id": "hpcoipk", "text": "100% - I am firmly in the camp that everything is negotiable especially where there are leverage points like you mentioned.  I only mentioned it because like you said the numbers themselves were more indicative of differences in lease types vs. negotiation points.  And just from a point of perspective non-LOI lease terms are very rarely used as post-LOI rent adjustment items.  Typically when negotiating gross ups, they either come out entirely or get adjusted to say 90% gross up instead of 100% - it would be somewhat odd to have a gross up clause or other risk adjusting mechanism change base rent where a triggering event (e.g. vacancy) may not even occur during the lease term.  \n\nSounds like we're saying the same things - always somewhat tough through forums so great to have multiple perspectives.", "replies": [], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hpc3gap", "text": "It does depend on vacancy, but also on the variable portion of expenses and the tenant\u2019s pro-rata share of the building area. In a lot of cases the gross up prevents tenants from overpaying their share.", "replies": [], "depth": 1}, {"id": "hpc64ug", "text": "The benefit to the tenant would be a lower base rent.\n\n$10.00 base rent with gross ups for expenses or a $12.00 base rent with the landlord paying more of the expenses.", "replies": [{"id": "hpc94b2", "text": "That makes sense, thank you for explaining!", "replies": [], "depth": 2}, {"id": "hpdlikq", "text": "Not really correct, gross up refers to the portions of the common building areas attributable to the leased premises. An office suite for instance might only physically be compromised of 1,000sf. If the building \u201cgross up\u201d is 15% (to account for common hallway ways, lobby, common washrooms, etc) then the rentable area would be 1,150sf. This ensures no cost leakage to the LL and fair allocation of building costs to all tenants.", "replies": [], "depth": 2}], "depth": 1}, {"id": "hpckdsm", "text": "Theoretically, there is no benefit to either the tenant or the landlord if done properly. Gross ups are intended to fairly allocate the cost of the tenant\u2019s occupancy to the tenant and not have the landlord punished for a partially empty property. \n\nAs an example, assume a tenant is 50% of a building and pays their pro rats share on management fees (calculated as a % of gross receipts). The building is 50% occupied, and the management fee is $50. If you just take $50 x 50%, the tenant would only pay $25 even though the cost of their occupancy is $50. If you gross up management fees to 100%, then the tenant pays 50% of $100, which equals the management fee from their space.", "replies": [{"id": "hpdkzgh", "text": "This is the best answer", "replies": [], "depth": 2}], "depth": 1}, {"id": "hpcpxzk", "text": "So is it considered NNN?", "replies": [], "depth": 1}, {"id": "hpdmsf3", "text": "You have your answer for gross up. In general passings back operating expenses also ensures a building is maintained to higher standards than if tenants decide to maintain a property. A building owner will do preventative maintenance on items such as regular HVAC check and cleaning or resealing and painting the parking lot that otherwise would not happen if left to tenants to decide.\nThis is good for tenants because the common areas remain cleaner and better maintained than leaving the decision up to the tenants or disincentivising the owner from doing maintenance by not having the maintenance expenses reimbursed. \nSlumlords in apartment buildings are notorious for bad maintenance because they don't get reimbursed for maintenance in their leases so owners do the bare that is required.\nIn retail and office leases with CAM reimbursements there can be some goofy incentives for maintenance reimbursements. Typically these reimbursements encourage an owner to repair items and keep them going past the end of their useful life instead doing capital expenditures to replace something that would not be reimbursed. Having a leaking roof patched 4 times at a cost almost as much as replacing the roof will have the expense passed back to the tenants. Replacing that same roof would be Cap Ex and couldn't be passed back to tenants. The same thing for repairing old elevators vs replacing them.", "replies": [], "depth": 1}]