A gross lease is an agreement where the tenant pays the property owner a fixed rental fee for the exclusive use of the property. This flat fee covers all associated property ownership costs, such as taxes, insurance, and utilities. Gross leases are highly adaptable to tenant needs and are widely utilized in the commercial property rental market.
Key Takeaways
- A gross lease includes all incidental charges incurred by a tenant, such as property taxes, insurance, and utilities.
- Commonly used for commercial properties like office buildings and retail spaces.
- The two main types are modified gross leases and fully serviced leases.
- Gross leases differ from net leases where tenants are required to cover one or more of the property’s associated costs.
How a Gross Lease Works
A lease is a contract between a property owner (lessor) and tenant (lessee) granting the tenant exclusive use of the property for a specified period in exchange for regular, fixed payments.
Under a gross lease, tenants use the property exclusively by paying a flat fee, generally common in office buildings and retail spaces with multiple lessees. Landlords set these rental fees to cover property operating costs, which include:
- Property taxes
- Insurance
- Standard utilities
- Routine expenses
Rent is typically determined either through historical property data or negotiation between landlord and tenant. For instance, tenants might request additional services like janitorial or landscaping in their gross lease.
Gross leases allow tenants to plan their expenses meticulously, making them advantageous for businesses aiming to minimize variable costs, enabling growth without the complexities of net leases. When a gross lease excludes insurance and utilities, those costs fall to the tenant’s responsibility.
Types of Gross Leases
Modified Gross Lease
A modified gross lease incorporates core provisions of a gross lease while maintaining flexibility. Tenants pay a base rent and a proportional share of additional costs like property taxes, utilities, insurance, and maintenance.
For example, the lease may stipulate tenants cover electricity while landlords handle waste management. Such leases are prevalent in multi-tenant commercial spaces like office buildings.
Fully Service Lease
A fully serviced lease is the simplest, requiring tenants to pay only rent, with landlords handling all other costs (e.g., utilities, taxes, maintenance). This often makes fully serviced leases more expensive as landlords bundle these costs into the rental fee.
Advantages and Disadvantages of a Gross Lease
Advantages for Landlords
- Higher rental fees by including operating costs
- Ability to pass inflationary costs to tenants annually
Disadvantages for Landlords
- Responsibility for unexpected additional costs like high utility bills or repairs
- Increased administrative tasks to ensure timely bill payment
Advantages for Tenants
- Fixed rent with no additional costs
- Time savings as financial administrative duties fall to the landlord
Disadvantages for Tenants
- Possibly higher rent payments
- Reliance on landlords for timely property maintenance
Gross Leases vs. Net Leases
In a net lease, tenants are responsible for some or all property-associated costs, like utilities, maintenance, insurance, etc. There are three types of net leases:
- Single Net Lease: Tenant covers rent plus property taxes.
- Double Net Lease: Tenant covers rent plus property taxes and insurance.
- Triple Net Lease: Tenant covers rent, property taxes, insurance, and maintenance. Net leases give tenants control over certain costs but also more responsibility, often restricting property alterations and being subject to variable utility costs.
Gross Lease FAQs
What Is the Difference Between a Lease and Rent?
A lease is a binding contract granting the tenant full access to the property; rent is the charged fee for exclusive property use.
What Are the Main Types of Commercial Leases?
Commercial leases are primarily categorized into gross and net leases, further subdivided into modified gross leases, fully serviced gross leases, and varied net leases (single, double, triple net).
What Is the Most Common Type of Commercial Lease?
Gross leases remain the most common and simpler lease type, encompassing all property-related costs besides offering exclusive property usage for a predetermined fixed sum.
Related Terms: net lease, modified gross lease, fully service lease, single net lease, double net lease, triple net lease.
References
- Thomson Reuters Practical Law. “Gross Lease”.
- eFinance Management. “Gross Lease”.
- CFI. “Lease”.
- iOptimize Realty. “What is a Gross Lease in Commercial Real Estate?”
- WallStreetMojo. “Gross Lease”.
- Squarefoot. “What is a Full Service Gross Lease”.
- Reoptimizer. “Pros and Cons of a Modified Gross Lease”.
- Salomons Commercial. “Commercial Leasing 101”.
