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.
Table of contents
- 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 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, 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 leaseLeaseLeasing is an arrangement in which the asset's right is transferred to another person without transferring the ownership. In simple terms, it means giving the asset on hire or rent. The person who gives the asset is “Lessor,” the person who takes the asset on rent is “Lessee.” 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.
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 leaseModified Gross LeaseModified Gross Lease is a lease rental agreement wherein the lessee pays for the basic rent at the start of the lease and also pays for the proportionate share of property taxes, insurance premiums, and maintenance expenses during the lease tenure. It is majorly used in the case of commercial properties where there is more than one tenant to share the property. structure is designed to segregate the expensesExpensesAn expense is a cost incurred in completing any transaction by an organization, leading to either revenue generation creation of the asset, change in liability, or raising capital.. 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.
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.
- 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 expensesOperating 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., and hence they can freely do their business.
- 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 earningsEarningsEarnings are usually defined as the net income of the company obtained after reducing the cost of sales, operating expenses, interest, and taxes from all the sales revenue for a specific time period. In the case of an individual, it comprises wages or salaries or other payments. by implementing energy-saving equipment.
- A landlord can pass on the inflation cost to the 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.
- 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:
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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)
The two gross lease structures include – Modified and Fully Serviceable. The former lease type segregates expenses such as electricity bills. In contrast, as the name suggests, the fully serviceable lease means that the landlord is responsible for all the expenses.
For some renters, a modified lease is a common choice. It enables the landlord and renter to create a more flexible and straightforward arrangement. Given that they are covering some costs, it may also present an opportunity for the renter to reduce the lease on the lower-priced unit.
A triple net lease is a contract between a property owner and a tenant. The tenant agrees to pay for building or space rental and monthly property taxes, insurance premiums, maintenance, and repairs.
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 –