Gross Lease

What is a Gross Lease?

A gross lease is a lease type wherein tenants pay only a single fixed payment to the landlord, including rent, to enjoy and exercise the right to use that property. This amount helps the landlord to bear the rest of the costs, like property tax, insurance, maintenance, and ancillary expenses.

The gross lease amount can be paid at regular intervals, be it weekly, monthly, or even annually. Here, the landlords have to do a lot of homework to calculate a figure that would help them cover any additional charges as a result of the tenancy.

• Gross lease refers to a fixed single-shot payment made by the tenant to the landlord in addition to the rent for the latter to bear expenses, such as maintenance costs and insurance, borne by the landlord. 
• It has an easy procedure; the landlord calculates all expenses (rent, etc.) based on historical data and future estimations. Then, the tenant and the landlord negotiate and fix a final price for the rent.
• The tenants know what they are required to pay eventually, and the landlord can manage their funds accordingly for maintenance, insurance, etc.
• Gross and net leases are different in terms of the responsibility owned by the tenant and the landlord. The former is also used in malls and multi-storage buildings where numerous people use the same utilities. In contrast, a net lease is applicable where a single tenant uses the property, and only one can use the utility.

Gross Lease Explained

Gross lease in real estate is widely considered irrespective of the type of premises being used for the purpose. In a lease agreement, there are always two parties; one is the landlord, who is the lessor, and the other is a tenant called the lessee. A gross lease refers to an arrangement wherein the tenant gives only one fixed payment to the landlord.

• A landlord calculates expenses like rent, taxes, insurance, repair & maintenance, and other day-to-day costs. It is calculated based on historical data and future estimated costs.
• After calculating the fixed amount, the landlord and tenant jointly negotiate the fixed amount of rent, terms, and conditions of the lease and reach the final amount that will mutually benefit them.
• This type of lease favors tenants as they have to pay only fixed rent, and all other responsibilities are taken care of by the landlord. Since the tenant knows what they need to pay, they can budget their funds accordingly.
• This type of lease is used when a tenant does not want to take the responsibility of making multiple payments or does not have enough workforce to take care of all their belongings. Instead, the tenant wants to make a single payment that includes all these expenses for the landlords to take care of all operating expenses.

Types

There are two types of structures to help understand the gross lease definition even better. Let us have a look at them:

#1 - Modified Lease

The modified gross lease structure is designed to segregate the expenses. The tenant agrees to bear property tax, insurance costs, water, and electricity bills. These aren't considered at the time of finalizing the rent amount.

#2 - Full Service Lease

This lease structure makes landlords liable for all the expenses, which are included in the total rent that tenants pay. The owner, however, passes on the inflation in cost to the tenant, and the tenant is responsible for inflation in cost compared to the base year or first year of the lease agreement.

Example

Suppose Tom rented a residential premise and signed a lease agreement to enjoy the rights over it in exchange for the payment as asked for by the owner or the lessor. The tenant or the lessee, here, asks the owner for additional landscaping services over time.

Based on the addition of the terms and the negotiations made, the lessor or owner of the property finalizes a gross lease amount, which the former has to pay at regular intervals inclusive of the rent amount. This extra sum helps the owner to take care of the additional requirements of the lessee.

Advantages

Tenant

• The tenant must pay fixed rentals regardless of increased expenses like tax and insurance.
• It is easy to plan the expenses as the tenant knows the costs.
• The tenant is not responsible for the timely payment of these operating expenses, and hence they can freely do their business.

Landlord

• A landlord gets higher rent than other lease agreements because they are based on the estimate and fixed solely at the owner's discretion.
• The landlord can increase the earnings by implementing energy-saving equipment.
• A landlord can pass on the inflation cost to the tenant.

Disadvantages

Tenant

• Here, the fixed rental amount is based on the estimated cost and is mainly at the landlord’s discretion. Therefore, the rent charged can be high.
• A tenant controls the price and might not reduce the cost.

Landlord

• The landlord gets fixed rent even if the operating expenses, taxes, and insurance costs increase.
• The landlord is responsible for timely payments of all the costs, including penalties and late fees, if any.
• The tenant does not make any effort to reduce operating expenses like water and energy.

Gross Lease Vs Net Lease

Following are the differences between a gross lease and a net lease:

1. In a former type, the tenant pays only a fixed payment to the landlord, whereas in a net lease, tenants have to pay taxes, utilities, and other ancillary expenses in addition to the monthly rent.
2. The landlord pays taxes, insurance, and maintenance costs in the gross type. However, the tenant is responsible for paying these expenses in a net lease.
3. In a gross lease type, a tenant can efficiently prepare their expense budget. On the contrary, in a net lease, tenants pay variable expenses, which vary monthly.
4. In a gross type, a tenant can’t take steps to reduce energy and water bills. They, however, can mitigate these costs in a net lease.
5. The monthly fixed rental gross amount is higher than the net lease because it includes taxes, insurance, and maintenance cost. Since the owner sets it, it takes a more elevated amount considering the inflation and responsibility of payment.
6. In the gross lease form, the landlord is responsible for any penalty in case of delayed payments or any violation. In contrast, under a net lease agreement, the tenant holds all accountability.
7. The gross type is generally used in malls and multi-storage buildings where numerous people use the same utilities. In contrast, a net lease is applicable where a single tenant uses the property and utilities.

Frequently Asked Questions (FAQs)

Recommended Articles

This article has been a guide to what is Gross Lease. We explain vs net lease, its types - modified & full service along with an example, advantages & disadvantages. You can learn more about financing from the following articles –

• Leaseback
• Leasehold
• Sublease
• Deferred Compensation