Types of Commercial Leases: The Gross Lease

Focus: Gross Leases

 

When you are finally ready to lease space for your business, it’s always a good idea to fully understand the different kinds of leases available to you. Commercial leases are not one size fits all, therefore it’s important to find the lease option that works best for you and your business.

Looking at commercial leases may seem overwhelming, but this basic guide will give you a head start on what you should be looking for and how to find the right space for your business’ bottom line.

Gross Lease (Full Services Lease)

Rent Basis: Rent

Commonly used in: Office and some retail

Modified Gross or Net Lease

Rent Basis: Base rent + some (or all) Utilities

Commonly used in: Any commercial lease

Triple Net Lease (NNN)

Rent Basis: Rent + Utilities

Commonly used in: Industrial & Retail

Percentage Lease

Rent Basis: Base rent + percentage of monthly sales

Commonly used in: Retail businesses

To kick off this series, of posts about commercial leases, let’s start with one of the most simple kind of lease, the Gross Lease or Full-Service Lease.

The Gross commercial lease is used most often in multi-tenant and single tenant office buildings, some retail, and occasionally industrial spaces. The landlord, the lessor, collects a fixed rental rate from the tenant on a monthly bases without collecting any additional expenses, such as in a NNN Lease, for example. The landlord pays all additional expenses

Benefits to the Tenant:

1. Tenant pays one monthly fixed rate (no surprise expenses)
2. Tenant doesn’t have to worry about CAMs (Common Area Maintenance)
3. Doesn’t have to pay taxes or insurance on the space

Things to think about as a tenant:

• Gross or full-service leases tend to have higher rental rates due to higher costs for the landlord (taxes, insurance, building maintenance).
• As costs to the landlord increase over time, so will your monthly rent. Look out for escalation clauses in your contract the specify what these increases will be and when they will occur.

Benefits to the Landlord:

1. Potentially higher rental rates to cover insurance, taxes and building maintenance
2. More control over the quality of maintenance and services

Overall, a Gross/Full-Service lease may be right for you if you are looking to simplify your real estate expenses. Another option that falls into both the Gross and Net Lease (article coming soon) categories is the Modified Gross Lease.

A Modified Gross lease is similar to a Gross lease in that the tenant pays a monthly fixed base rent, but the tenant is also responsible for their own utility expenses. The landlord will still pay the building operating costs (taxes, insurance and maintenance), but utilities and interior cleaning services are common tenant paid expenses in a Modified Gross lease.

Benefits to the Tenant:

1. Slightly lower base rent
2. More control over utilities & other interior expenses
3. Mostly fixed rate besides utilities so no surprise expenses from real estate taxes or other building operations costs

Benefits to the Landlord:

1. Does not have to account for tenant utility expenses
2. Isolation from risk in expenses such as gas & electric costs (seasonally & absolute)

Both types of leases are pretty simple to understand and great options for a business looking for a consistent lease option. Of course, always understand the lease in its entirety and consult a professional for any legal advice.

Gross lease, Reno Commercial real estate, types of commercial leases