What is a Gross Lease?
Gross lease is one of the types of a lease in which tenants pay only single fixed payment to the landlord, which only includes rent and landlord bears all other costs like property tax, insurance, maintenance, and other ancillary expenses.
How does it work?
In a lease agreement, there will always be two-party one is a landlord who is the lessor, and the other is a tenant who will be called the lessee. Gross lease is one of the types of a lease agreement in which tenants and landlords will make such an arrangement in which the tenant will give only one fixed payment to the landlord.
- A landlord will calculate all the expenses like rent, taxes, insurance cost, repair & maintenance, and other day to day expenses. It will be calculated based on historical data and future estimated costsEstimated CostsCost estimate is the preliminary stage for any project, operation, or program in which a reasonable calculation of all project costs is performed and thus requires precise judgement, experience, and accuracy..
- After calculating the fixed amount landlord and tenant will jointly negotiate the fixed amount of rent and terms and conditions of the lease and reach the final amount that will be beneficial for the tenant and landlord both.
- This type of lease is favorable for the tenant because they have to pay only fixed rent, and all other responsibilities will be taken care of by a landlord. Since the tenant knows what he needs to pay; therefore, he can budget accordingly and make the arrangement of funds for meeting this expense.
Gross Lease Structure
There are two types of structure in gross lease.
#1 – Modified Gross Lease
Structure of this type of lease designed in a way that some expenses are the responsibility of the tenant, and the tenant has to bear these agreed expenses like Property tax, Insurance cost, water & electricity bill, and this will be not be considered at the time of finalizing the rent amount.
#2 – Fully Service Lease
The structure of this type of lease is designed in a way that all the expenses are the responsibility of the landlord, and the landlord will be borne and pay all the expenses. These are included in the total rent, which is paid by the tenant, but the owner will pass on the inflation in cost to the tenant, and the tenant will be responsible for inflation in cost as compared to a base year or first year of the lease agreement.
Gross lease vs. Net lease
Below are the differences between Gross lease vs. Net lease:
- In a gross lease, the tenant will pay only fixed payment to the landlord, whereas in net lease, tenants will pay taxes, utilities, or other ancillary expenses in addition to the monthly rent.
- In a gross lease, the landlord will be responsible for payment of taxes, insurance, and maintenance cost in net lease tenant will be responsible for payment of these expenses.
- In a gross lease, a tenant can efficiently prepare the budget of his expense because he knows what they need to pay, whereas, in net lease, variable expenses will be paid by a tenant, which may vary every month.
- In a gross lease, a tenant will not take any steps for a reduction in energy and water bill, but in net lease, a tenant will take steps for a reduction in energy and water bill.
- In gross lease monthly fixed rental amount will be higher as compare to net lease because it includes taxes, insurance, and maintenance cost, and since it is the fixed owner will take a higher amount considering the inflation and responsibility of payment.
- In gross lease landlord will responsible for any penalty and late fees in case of delayed payment or any violation whereas in net lease tenant will be responsible for the same.
- Gross lease is generally used in malls, and multi-storage buildings where many persons use the same utilities, and many utilities are common in use. In contrast, a net lease is applicable where the property is used by single-tenant, and only one tenant can use the utilities.
Advantages of Gross Lease
Below are the benefits of gross lease:
Advantages to the Tenant
- The tenant has to pay fixed rental regardless of an increase in variable expenses like tax, insurance.
- It is easy to plan in expenses because the tenant knows the rental amount.
- The tenant does not have any responsibility for the timely payment of these operating expenses, and he can freely do his business.
Advantages to the Landlord
- A landlord will get higher rent as compared to other lease agreements because it is based on the estimate, and this will be fixed solely on the discretion of the owner.
- The landlord can increase his earning by implementing some energy-saving equipment.
- A landlord can pass on the inflation cost to the tenant.
Disadvantages of Gross Lease
Below are the disadvantages of gross lease:
Disadvantages to the Tenant
- As in gross lease, the fixed rental amount is based on the estimated cost and mostly at the discretion of the landlord; therefore, the rent charged is high.
- A tenant does have control over the cost, and they will not be motivated by reducing the cost.
Disadvantages to the Landlord
- The landlord will get fixed rent, even operating expenses, tax, and insurance costs will increase.
- The landlord will have all the responsibility for making the timely payment of all the costs, including penalty and late fees, if any charged.
- The tenant will not make any effort to reduce the operating expenses like water and energy.
In a gross lease, the tenant will pay only a fixed rental amount to the tenant and will not pay any amount for operation expensesOperation ExpensesOperating expense (OPEX) is the cost incurred in the normal course of business and does not include expenses directly related to product manufacturing or service delivery. Therefore, they are readily available in the income statement and help to determine the net profit.. This type of lease is used when a tenant does not want to take the responsibility of multiple payments, or they do not have enough manpower to take care of all their things instead he wants to make single payment which includes all these expenses and landlord will take care of all the operating expenses for this landlord is charging some higher amount as compared to net lease.
This article has been a guide to what is a gross lease and its definition. Here we discuss the structure and working of the gross lease along with advantages and disadvantages. You can learn more about financing from the following articles –