Gross Lease is the simplest type of lease. In this format, the lessee agrees to pay the lessor a flat fee at a regular interval, for instance, monthly. The lessor takes care of any and every expense associated with the property. The rate charged does not change. It is a rent agreement in which the lessor bears the cost of keeping up the rented asset, including its protection and charges. Gross lease rental is usually higher than the net lease rental as the lessor would have factored in different types of expenses in the rentals that are being charged.
Commercial real estate leases can be broadly classified as either Gross Lease or Net Lease.
Gross Lease vs. Net Lease
In a gross lease, the tenant agrees to pay a flat rent, and the landlord assumes the responsibility of paying for all the expenses, including maintenance, insurance, and taxes. The cost of these is usually factored in increased lease fees. In a net lease, the tenant, along with the rental fee, assumes some or all the cost of other expenses associated with the property. Thus the rental fee in comparison to the gross lease is less. Net lease is usually long-term in tenure, whereas gross lease is usually short-term.
Gross Lease Structures
Gross Lease can be carried out in different variations based on the requirement. It can be entered as an absolute gross lease agreement or can be modified to have the best of both gross as well as net lease features. In some cases, it may be agreed upon as a full-service lease.
Modified Gross Lease
Modified Gross Lease can be defined as an amalgamation of an absolute gross lease and absolute net lease. You can also address them as a modified net lease. As the name suggests, it is a basic gross lease with few compromises that benefit both the tenant and the landlord. In such a type of rent agreement, not all expenses are borne by the landlord. Some of the expenses may need to be borne by the tenant. Some of the commonly negotiated expenses include property tax, insurance, common area maintenance (CAM), utilities, and repairs.
Fully Service Lease
Fully Service Lease is similar to an absolute or flat gross lease but also contains provisions to pass on some or total inflation in cost to the tenant. Unlike an absolute gross lease, the terms of a full-service lease usually require the tenant to be responsible for any increase in operating expenses beyond the base year of the lease.
Pros and Cons of Gross Lease
Pros to the Tenant
The most important benefit to a tenant is that they pay the same rentals regardless of the increase in operating expenses. Planning of expenses is easier as the exact monthly rental cost is known.
Pros to the Landlord
The rent charged in the gross lease is higher as it is based on the estimate of associated costs created solely by the owner’s discretion. This can result in a potential surplus for the landlord after factoring in the overall cost. Also, the inflation cost can be passed on to the tenant in some cases.
Cons to the Tenant
As the rent is based on estimated cost, the rent charged is high. Also, tenants have less control over costs.
Cons to the landlord
The landlord is exposed to any unexpected expenses or inflation in property expenses.
Gross Lease Properties
A gross commercial lease is often used in multi-tenant or single-tenant commercial buildings and some retail properties.