CAM gross-up clause: what it is and how it works
How a CAM gross-up adjusts variable expenses to a stated occupancy: a worked example from 70% to 95%, which costs it covers, and what to check in the lease.
A CAM gross-up is one sentence in a lease that can change a tenant’s reconciliation by thousands of dollars, and it is also one of the most misapplied. It adjusts certain operating expenses to what they would have been if the building were more occupied, so a half-empty center does not push its costs onto the tenants who are there. This guide explains what the clause does, shows the arithmetic with a worked example, and lists the mistakes to avoid.
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What a gross-up is and why leases include it
Some operating costs move with occupancy. Janitorial, utilities, trash removal, and some services use more when more tenants are in the building. If a building is 70 percent occupied, those costs are lower than they would be at full occupancy, so the pool you divide among tenants is smaller than it would be if the building were full.
A gross-up raises those variable costs to what they would have been at a stated occupancy level, such as 95 percent. That keeps tenants from paying a share of a pool that is artificially low because of vacancy, and it protects the landlord from absorbing the variable costs that the vacant space would have caused.
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Which expenses get grossed up
Only variable expenses are grossed up. Fixed costs do not change with occupancy, so they are left alone. Property taxes and insurance are generally treated as fixed. Landscaping, snow removal, and parking-lot costs are usually fixed too, unless the lease says otherwise.
The lease should list which categories are variable. If it only says “operating expenses will be grossed up,” you have an ambiguity worth resolving before the first reconciliation, not during a dispute.
Key points
- Usually grossed up: janitorial, utilities, trash, some security and cleaning services.
- Usually not grossed up: property taxes, insurance, and fixed-contract services.
- Check the lease: management fees, repairs, and services that scale with use.
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The formula
If the building’s actual occupancy is below the gross-up level, the grossed-up variable expense equals the actual variable expense divided by actual occupancy, multiplied by the gross-up occupancy. If actual occupancy is at or above the gross-up level, no adjustment is made.
In words: first estimate what the variable costs would be at 100 percent occupancy by dividing by the actual occupancy, then scale that back to the lease’s gross-up percentage. Leases commonly use 90, 95, or 100 percent. The percentage is whatever the lease says, not an industry standard.
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A worked example
Take a hypothetical 20,000-square-foot building that is 70 percent occupied. Variable expenses actually cost $60,000 for the year, and the lease grosses up to 95 percent.
Grossed-up variable expenses: $60,000 divided by 0.70, multiplied by 0.95, is $81,429 (rounded).
A tenant leasing 2,000 square feet has a pro-rata share of 10 percent (2,000 divided by 20,000). Its share of variable expenses is $8,143 with the gross-up, compared with $6,000 without it, a difference of $2,143.
Fixed expenses are shared as usual. If taxes, insurance, and other fixed costs total $100,000, the tenant’s 10 percent share is $10,000 with or without a gross-up, so its total CAM is $18,143 instead of $16,000.
Notice what the gross-up did not do. The occupied tenants, who make up 70 percent of the building, pay 70 percent of $81,429, which is $57,000. That is less than the $60,000 the landlord actually spent on variable costs. A properly built gross-up never lets the landlord collect more than the actual cost; in this case the landlord still carries $3,000 of the vacancy.
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Common mistakes
Gross-up errors tend to come from the same few places. Each one is worth checking before a reconciliation goes out.
Key points
- Grossing up fixed costs such as property taxes and insurance.
- Grossing up when actual occupancy is already above the lease’s gross-up percentage.
- Combining a gross-up with a pro-rata share that is based on occupied area, which counts the vacancy twice.
- Using the wrong occupancy figure, such as signed leases instead of occupied space, when the lease specifies one.
- Applying a cap before or after the gross-up in a different order than the lease says.
- Leaving the gross-up calculation out of the reconciliation backup, so the tenant cannot follow it.
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What tenants and landlords should each check
Tenants should confirm which expenses are treated as variable, which occupancy figure was used, that the total recovered across all tenants does not exceed the actual cost, and that the clause’s order of operations with caps and exclusions was followed.
Landlords should keep the occupancy calculation and the variable expense detail with the reconciliation, so the adjustment can be explained line by line if a tenant uses its audit right. The free CAM and NNN calculators on this site do not model gross-ups, so apply this step in your own worksheet and keep the lease clause beside it. This is general information, not legal advice; the signed lease controls.
FAQ
Frequently asked questions
What is a CAM gross-up?
A gross-up adjusts certain variable operating expenses to what they would have been at a stated occupancy level, such as 95 percent, when the building is less occupied. It keeps tenants from paying a share of an artificially low expense pool and keeps the landlord from absorbing variable costs caused by vacant space.
Which expenses are grossed up?
Variable expenses that move with occupancy, such as janitorial, utilities, and trash. Fixed costs such as property taxes and insurance are generally not grossed up. The lease should list the categories, and if it does not, clarify before the first reconciliation.
What occupancy level does a gross-up use?
Whatever the lease states. Commonly it is 90, 95, or 100 percent. If actual occupancy is at or above that level, no adjustment applies.
Can a gross-up make the landlord collect more than it spent?
Not if it is built correctly. A gross-up scales the pool to a stated occupancy, but the occupied tenants pay only their shares of it, so the landlord recovers less than or equal to the actual cost. If your reconciliation recovers more than 100 percent of actual costs, the clause or the math needs review.
Does a gross-up apply to NNN retail leases?
It can, if the lease includes the clause, although it is more common in multi-tenant office and gross leases with variable services. Many strip-center NNN leases do not have one. Check each tenant’s lease; do not assume.
How is a gross-up different from a base year?
A gross-up adjusts the current year’s variable expenses to a stated occupancy. A base year sets a reference year’s costs and has the tenant pay increases above it. A lease can include both, and the order in which they apply is a lease term.
Free template
Get the CAM reconciliation worksheet
The spreadsheet version: recoverable pool, each tenant's share, caps, proration, admin fee and the true-up balance. Comes with the reconciliation and audit checklists.
- CAM reconciliation worksheetSpreadsheet template
- CAM Reconciliation ChecklistPrintable checklist
- CAM Audit Checklist for Landlords and TenantsPrintable checklist
Put it into practice
TenantPoint handles this workflow in CAM reconciliation software and Commercial lease administration software. See all TenantPoint solutions or how it compares with other software.
This educational material is not legal, accounting, tax, or investment advice. Review controlling lease language and consult qualified professionals when appropriate.
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