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What is a Gross Lease?
A gross lease is a legal documents between a tenant and landlord under a flat rent amount. This type of commercial lease charges a gross rent and makes the landlord responsible for paying all incidental charges, building operating expenses, taxes, insurance, and utilities. A gross lease is a standard document used by office rental landlords.
This web page also defines gross leases.
How Does a Gross Lease Work?
A gross lease works like many commercial leases and is generally good for an office space lease . Office rentals are reasonably predictable for landlords regarding maintenance and upkeep, allowing them to price their spaces long-term more accurately.
Here’s an example of how a gross lease works :
- Prince of Paris Commercial Real Estate Co. rents commercial office space to professional companies, such as lawyers, accountants, insurance brokers, and more
- The company offers gross leases to prospective tenants
- They chose a gross lease since they want a more traditional landlord-tenant relationship
- Prince of Paris will pay for all maintenance, upkeep, common area usage, and repairs in exchange for rent based on the occupied square footage
- They will not pay for or allow structural modifications to the building
- They will allow tenants to make cosmetic modifications within their rented space, such as paint, wall hangings, carpeting, and fixture replacements
- These modifications are the tenants’ responsibility and must return original fixtures to the company upon termination
- Prince of Paris will allow tenants to include their business name or logo on external signage and office directories at no extra charge
From the above-referenced example, you can see the many considerations you’ll have to make as a landlord, even for “simple” gross leases. Every decision you make drafting your lease agreement will affect the types of tenants you attract, overall operations, and profitability. Ensure you select the correct type of agreement for your situation for the best possible result.
Types of Gross Leases
Two types of gross leases include full-service and modified gross leases. Here is a closer look at the two below :
Full-Service Gross Lease
Full-service gross leases are leases where the landlord is responsible for all costs associated with operating the building or space. The tenant is only responsible for the base rent and enjoys the freedom of a hands-off approach.
Modified Gross Lease
Modified gross leases are where the commercial tenant pays a base rent in addition to a portion of ongoing and incidental charges, such as taxes, utilities, maintenance, and insurance.
Terms to Negotiation in a Gross Lease
All gross lease terms are negotiable. However, your negotiating leverage is contingent upon the state of the local rental market. If there is an abundance of commercial space available, a potential tenant will have more negotiating power and vice versa.
Terms to negotiate in a gross lease may include :
Term 1. Gross Lease Term Lengths
Gross lease term lengths can last between three and five years, if not shorter. This type of lease agreement is usually shorter than standard lease lengths since the landlord retains most of the risk. It’s not unusual to offer a 12- or 18-month gross lease term length or depending upon your market.
Term 2. Lease Amount & Lease Increases
Another critical factor to consider is the lease amount. It is prudent to compare rates for comparable spaces. If the lease rate appears unjustifiably high, consider reducing your asking amount.
On the other hand, an overwhelming response to your rate may indicate that your price is too low. Check with local real estate associations for local market data, broken down by neighborhood, to help you decide.
Commercial landlords often include an annual rent increase in the lease terms. It is also worth noting that lease vs. rent differs since “rent” typically signifies a monthly agreement.
Term 3. Property Improvements
Property owners must also decide if they want to customize or modify spaces for tenants under a build-to-suit agreement or design-build contract . When requesting a significant amount of rent for your market, you could include property modifications at no extra charge while asking tenants to sign a longer lease length.
Term 4. Subleases
Establish whether or not you want to give tenants the option to sublease their space to another business entity . This provision is helpful in less competitive markets, where the tenant may have a replacement tenant in mind that is willing to finish the remainder of the lease. However, there are legal implications that come with subleases, so ensure that you carefully negotiate these terms if you allow them.
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Difference Between a Triple Net Lease (NNN) and Gross Lease
The main difference between triple net (NNN) lease and gross leases is that NNN leases don’t include maintenance, repair, and upkeep, whereas a gross lease generally does . Devising the right commercial office lease or building lease is essential to determine which option is the best fit for your business.
What Are Triple Net (NNN) Leases?
Triple net (NNN) leases vest the tenant with the responsibility and risk of property management in exchange for a lower base rent. This option allows the landlord to take a hands-off approach to property maintenance while still collecting a more stable rental income, making triple net leases attractive for portfolio owners.
For the tenant, self-management of the property has many advantages. They control their business expenses and can hire self-selected contractors to save money. The tenant is responsible for unexpected repairs under a gross lease.
Difference Between a Gross and Net Rent
The difference between gross and net rents is that gross rental is your total rental payment. Net rent is the total rental payment, less fees and taxes.
For example, let’s say your rental payment is $2,000. This number is your gross rent. We discover that your gross rent includes $140 for insurance and $260 in maintenance fees if we look closer and determine that your net rent is $1,600.
Gross vs. net rent matters since landlords need to account for financial and operating risks. Renters are happy to get a better deal on an office lease or building lease since gross rent is higher than effective net rents. Also, landlords typically offer rent discounts to entice rental agreement finalizations from well-qualified tenants.
What is a Gross Industrial Lease?
Gross industrial leases are lease agreements that include tax and insurance payments for an industrial company, such as oil & gas and manufacturing firms. The industrial tenant is responsible for any increase in taxes and insurance for the year. If the property is multi-tenant, common area expenses are typically quoted per square foot, capped by a percentage of total rented space.
Most industrial leases utilize gross industrial or triple net leases as their choice of a commercial lease agreement .
Get Legal Help with Gross Leases
Do you need legal advice on how to negotiate a commercial lease ?
Commercial lease lawyers can offer valuable insight, draft the final agreement, and help you negotiate the terms. Connect with a legal professional in your state today.
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