Harris County CAM Gross-Up: Why HCAD Adjustments Are Breaking Reconciliations (And How to Fix It)

Updated: February 2026 · For controllers and accounting managers at Houston-area commercial PMCs

1. The Houston Gross-Up Problem in Plain Numbers

Take a 100,000-square-foot Class A building in the Energy Corridor. Current occupancy sits at 73% — not unusual given the submarket's 22.9% vacancy. The lease's gross-up clause kicks in at 95% occupancy.

Here's where most property managers get it wrong.

Total variable operating expenses:    $850,000
Gross-up to 95%:   $850,000 × (95 ÷ 73) = $1,106,164

Step 1 — Separate expense categories:
  Truly variable (utilities, janitorial):  $620,000
  Step-function (management fees at 4%):   $125,000
  Fixed (taxes, insurance, security):      $105,000
                                      ──────────────
  Total:                                   $850,000

Step 2 — Gross-up only the variable portion:
  $620,000 × (95 ÷ 73) =                  $806,849

Step 3 — Add step-function costs unchanged:
  $806,849 + $125,000 =                    $931,849

Final grossed-up pool:                   $931,849

The delta: $1,106,164 − $931,849 = $174,315 tenant overcharge on a single building in a single year. Multiply that across a 10-property portfolio and you have seven-figure exposure.

Houston's current market conditions make this calculation non-negotiable. With Greenspoint at 49.1% vacancy and FM 1960 at 37.8%, gross-up provisions are triggering on nearly every lease in the MSA. Controllers who haven't audited their gross-up methodology recently have almost certainly been calculating incorrectly.

2. How HCAD Retroactive Adjustments Break Standard Gross-Up Formulas

Harris County Appraisal District operates on a timeline that doesn't align with CAM reconciliation cycles. Here's the collision that breaks most accounting systems:

• March 2024: You close the 2023 CAM reconciliation. Tenant's pro-rata share of property taxes: $125,000. Statement sent.
• August 2024: Landlord files a Section 25.25 protest on the 2023 assessed value.
• November 2024: HCAD reduces the 2023 assessed value by $2.1M. Tax refund to landlord: $47,200.

The question your lease probably doesn't answer clearly: does that $47,200 refund reduce the tenant's 2023 CAM obligation?

Most standard NNN leases say expenses are calculated on an “incurred” basis. The tax was incurred in 2023 at $125,000. But the landlord received a refund in 2024. Medic Pharmacy, LLC v. AVK Properties, LLC (Harris County District Court, 2022) established that landlords bear the burden of proving their expense ledgers are properly bifurcated and that tax protest costs cannot be folded into the CAM pool.

The gross-up contamination problem: When accounting systems receive the HCAD credit, they often apply it as a negative expense in the CAM pool — before gross-up is applied. Correct treatment: property tax adjustments must be applied to the fixed expense bucket after gross-up calculation, with documentation showing the HCAD notice number and effective period.

3. Fixed vs. Variable Bifurcation: The Calculation Most Managers Get Wrong

Fixed Expenses (excluded from gross-up)

Variable Expenses (subject to gross-up)

Management fees present the trickiest case. A 4% management fee on a building with $2M in gross revenues doesn't linearly scale with occupancy. Bill Brownfield's Escalation Handbook for Office Buildings (3rd ed.) recommends applying gross-up only to the portion of the management fee directly tied to tenant services — typically 40–60%.

4. Step-by-Step: Correct Gross-Up Calculation for a Partially Occupied Harris County Building

Scenario: 85,000 RSF Galleria-area office. Current occupancy: 68%. Lease gross-up threshold: 95%.

1. Pull the full operating expense register. Get every line item coded and categorized before calculating anything.
2. Bifurcate the expense pool.

   Fixed expenses total:        $412,000
   Variable expenses total:     $538,000
   Semi-variable (mgmt fees):    $84,000
   ─────────────────────────────────────
   Total operating expenses:  $1,034,000

3. Calculate the gross-up multiplier.

   Multiplier = 95% ÷ 68% = 1.3971

4. Apply multiplier only to variable expenses.

   $538,000 × 1.3971 = $751,640

5. Apply partial multiplier to semi-variable.

   Variable portion (50%): $42,000 × 1.3971 = $58,678
   Fixed portion (50%):   $42,000 × 1.0000 = $42,000
   Subtotal:                                  $100,678

6. Add fixed expenses at actual cost.

   $751,640 + $100,678 + $412,000 = $1,264,318

7. Apply HCAD adjustments to fixed bucket only, after gross-up.

   HCAD credit: ($31,400)
   Adjusted fixed: $412,000 − $31,400 = $380,600
   Final pool: $751,640 + $100,678 + $380,600 = $1,232,918

8. Calculate tenant pro-rata share.

   Tenant: 12,500 SF ÷ 85,000 SF = 14.71%
   Tenant CAM: $1,232,918 × 14.71% = $181,362

Frequently Asked Questions

Does the gross-up clause apply to all Houston commercial leases?

No. Gross-up provisions must be explicitly written into the lease. Most Class A office leases in Houston executed after 2015 include them, but older leases—common in Greenspoint and the Northwest Freeway corridor—often do not. If your lease does not include a gross-up provision, you cannot apply one unilaterally. Review the "Operating Expenses" and "Additional Rent" definitions in your lease before any calculation.

Can landlords include HCAD tax protest attorney fees in the CAM pool?

Under Medic Pharmacy, LLC v. AVK Properties, LLC (2022), no—unless the lease specifically permits recovery of tax protest costs. Standard leases allow property taxes to pass through, but legal and consulting fees to contest those taxes are generally considered landlord expenses. Check your lease's definition of "Operating Expenses" for language like "costs of contesting assessments" before including these.

How do we handle a mid-year HCAD supplemental assessment?

If HCAD issues a supplemental tax bill mid-year (common when property ownership transfers or improvements are completed), add it to the fixed expense bucket in the period it is incurred. If the reconciliation has already been sent, issue an amended statement. Do not gross it up—it is a fixed expense regardless of timing.

What occupancy percentage should we use: leased or occupied?

Most Houston leases specify "leased and occupied" or just "leased." If your lease is silent, BOMA and Texas courts generally apply the "leased" percentage—meaning tenants who have signed leases but have not yet taken occupancy count toward the occupancy figure. This distinction matters significantly during high-sublease periods like the current Energy Corridor market.

We received an HCAD refund for a closed reconciliation year. Do we owe tenants money?

Almost certainly yes, if the lease defines operating expenses on an actual-cost basis and includes reconciliation provisions. Issue amended CAM statements for the affected year crediting the refund on a pro-rata basis. The refund applies only to the fixed expense (tax) line; do not adjust the grossed-up variable expense calculation for that year.