Gross Lease

What is a Gross Lease?

A Gross lease is a type of lease wherein tenants pay only a single fixed payment to the landlord, which includes rent. The landlord bears all other costs like property tax, insurance, maintenance, and other ancillary expenses.

Gross Lease Explained

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.

Gross-Lease

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Gross Lease Structure

There are two types of structures –

#1 – Modified Gross 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.read more 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.read more. 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 – Fully Service Lease

This type of lease structure is designed so that all the expenses are the landlord’s responsibility. These are included in the total rent paid by the tenant. The owner, however, will pass on the inflation in cost to the tenant, and the tenant will be responsible for inflation in cost compared to a base year or first year of the lease agreement.

Gross lease vs. Net lease

Following are the differences between Gross lease and Net lease:

  1. In a gross lease, 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. In a gross lease, the landlord pays taxes, insurance and maintenance costs. However, the tenant will be responsible for paying these expenses in a net lease.
  3. In a gross lease, a tenant can efficiently prepare his/her expense budget, whereas, in a net lease, variable expenses are to be paid by a tenant, which varies monthly.
  4. In a gross lease, a tenant can’t take steps to reduce energy and water bills, but in a net lease, these costs can be mitigated by the tenant.
  5. The monthly fixed rental amount is higher than the net lease as compared to gross 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, the landlord is responsible for any penalty in case of delayed payments or any violation. In contrast, the tenant is held accountable for the net lease.
  7. Gross lease 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 only one can use the utilities.

Advantages of Gross Lease

Advantages to the Tenant

Advantages to the Landlord

Disadvantages of Gross Lease

Disadvantages to the Tenant

  • In a gross lease, the fixed rental amount is based on the estimated cost and mainly at the landlord’s discretion. Therefore the rent charged can be high.
  • A tenant does have control over the price, and they might not be motivated by reducing the cost.

Disadvantages to the Landlord

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

Conclusion

The tenant has to pay only a fixed rental amount in a gross lease and not any 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.read more. This type of lease is used when a tenant does not want to take responsibility for 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, and the landlord will take care of all operating expenses as the landlord is charging a higher amount than the net lease.

This article has been a guide to a gross lease and its definition. Here we explain how Gross Lease works along with its structure, example and its comparison with net lease. You can learn more about financing from the following articles –

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