grossing up expenses – argus valuation dcf

This post is a part of a collection of posts about Argus Valuation DCF and the Argus Certification Exam.  You can view all posts in the series by following the Argus Certification Exam tag.

In the last post about Argus, I looked at reimbursable expenses: what they are, the types of leases that have pass-through expenses and how to set them up in Argus.  Grossing up expenses builds on the concept of reimbursable expenses.  Let’s start with an example:

We are partners in a 50,000 square foot office property.  There is currently one tenant with a triple-net lease (NNN) in the property occupying 10,000 square feet, or 20% of the net rentable area. The cost of janitorial is $0.85 a square foot, but it’s only 50% fixed.

At 50% fixed and 20% occupancy, the total costs for janitorial are:

50,000SF * $0.85PSF * 50% (fixed) = $21,250
50,000SF * $0.85PSF * 50% (variable) * 20% (occupied) = $4,250
Total Reimbursed: $25,500

This is the concept of reimbursable expenses we explored last time.  When expenses are grossed up, the total reimbursable paid by the tenant is based on the grossed up occupancy percentage instead of the true occupancy rate.  What happens if we gross up the janitorial expenses to 90% occupancy?

50,000SF * $0.85PSF * 50% (fixed) = $21,250
50,000SF * $0.85PSF * 50% (variable) * 90% (gross up occupancy) = $19,125
Total Reimbursed: $40,375

The total operating expenses will remain $25,500 because the property is still only 20% occupied, but the tenant will reimburse janitorial costs as if the property was 90% occupied:

Setting the gross up percentage for reimbursable expenses is done in the reimbursable expenses window.  Simply selecting the check box and defining the gross up percentage.

The Schedule of Expense Reimbursement Revenue report (Reports -> Property Level) shows the total amount reimbursed by the tenants by expense as seen in the earlier screen shots.

photo credit: Andres Rueda