Wednesday, May 23, 2007

What is so gross about my lease?

What is a "Gross Lease"?

A question I get asked fairly frequently from business owners is what does it mean for a lease to be "gross"? This is a common term in commercial real estate.

It doesn't meant that your lease smells funny, has stuff oozing out of it, or anything like that...

A pretty good textbook definition is that a gross lease is one in which the landlord pays all expenses associated with the ownership of the property including maintenance, taxes, and insurance.

Basically, with a gross lease a tenant pays their monthly rent and the landlord pays all associated expenses with the property. This arrangement is usually found in office buildings and buildings with many small tenants. It's a simple way of calculating a rental rate.

The "opposite" (for lack of a better word) of a gross lease is a triple net lease. What is that all about? Three nets???

Basically a textbook definition of a triple net lease is one in which the tenant pays rent to the landlord, as well as a share of the taxes, maintenance, and insurance expenses based on the tenant's use of the property.

In this example, a tenant would have a fixed rent and on top of that he would pay a share of all expenses of the property (the nets). If the taxes go up, the tenant kicks in a little more, if the taxes go down, the tenants obligation to pay goes down. The amount of the expenses a tenant must pay is based on the amount of space they occupy in a building. If a tenant occupies 1,000 SF of a 5,000 SF building, he would be responsible for 20% of all of the taxes, insurance, and maintenance costs such as snow removal and landscaping.

This type of lease is commonly seen in retail properties and industrial properties or in properties where there is only one company occupying the entire property. It is also becoming more and more popular and is commonly seen in newer buildings.

Is one better than the other??? There are arguments on both sides I guess.

If you have a gross lease, you don't have to worry about drastic increases in property taxes or insurance because your rent is fixed and the landlord pays the taxes and insurance. With a gross lease there is usually some sort of pre-determined annual increase built into the lease to cover possible expense increases but because that is all negotiated up front, you can budget for the annual increases. Now if the taxes go down (yeah right!) then the landlord benefits because he is still collecting the same amount of money and his expenses just went down.

With a triple net lease, the expenses are usually reviewed every 6 months and if there has been an increase in taxes or insurance, that increase is passed along to the tenant and they may not have even known that taxes were going to go up. With a triple net lease, if any expenses go down, the amount the tenant pays goes down accordingly so the tenant is able to take advantage of the decrease.

There are several variations of both types of lease including modified gross leases, double net leases, graduated leases, single net leases...the list goes on but the "Gross Lease" and the "Triple Net Lease" are the two you are most likely to come across.

Just remember that with any commercial real estate lease or any lease for that matter, you should consult a real estate professional and also an attorney. These people are experts at what they do.

So the next time you hear somebody talking about how gross their lease is, you won't be caught with your jaw down wondering what they are talking about...


TheMillionairesBlog said...

Great article, I have 35 rental properties and have done alot of flipping but never any commercial real estate

Beland said...

Thanks for checking out my blog. I hope to educate a few people about commercial real estate and maybe along the way do a little business with them... FYI, you are already way into commercial real estate with the 35 rental properties. A good basic definition of commercial real estate can be found on CityFeet

Basically commercial real estate is any real estate that generates income for the owner.