What Is a Gross Lease Real Estate Agreement?
October 11, 2022
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If you're signing a commercial real estate lease, you have many options regarding the terms. Knowing the different types of leases, including the gross lease real estate agreement, the modified gross lease, and the triple net lease, can help you make the right choice.
What Is Gross Lease Real Estate?
In a gross lease in real estate, tenants pay a flat fee for the use of the property. The fee includes exclusive use of the property and all other expenses, including utility costs, property taxes, and insurance.
Who Pays the Expenses of the Building in a Gross Lease?
In a gross lease, the landlord pays all expenses, including utilities, insurance, and property taxes. This can be advantageous for the landlord if he finds ways to lower utility or insurance costs. The lease agreement stays the same, but the landlord's variable costs decrease, leaving him with more profit.
Which Type of Lease Is Most Common for Residential Property?
Most residential properties have a gross lease. However, most don't include utility usage in the lease. The variable costs, such as electricity and heat, are the tenant's responsibility. The landlord pays property taxes, insurance, water, and sewage.
Types of Gross Leases
There are two options within gross leases for rentals: the modified gross lease and the full-service gross lease.
Modified Gross Lease
A modified gross lease is a cross between a gross and net lease. It's a gross lease because the tenant pays a flat fee for rent, called the base rent. The remaining costs associated with a property, such as utilities, taxes, insurance, waste pickup, and sewage, are split up according to the agreement between the landlord and tenant.
For example, the landlord might pay the property taxes and insurance but leave utilities and waste pickup charges to the tenant.
Full-Service Gross Lease
The full-service gross lease includes all costs in the lease. The tenant only has to worry about one flat payment each month. The landlord figures the rent to cover all operating costs associated with the property.
How Do You Calculate Gross Lease?
Landlords can use historical property data or a thorough analysis of the property costs when determining the gross lease rent. Landlords and tenants often negotiate the costs too. For example, the tenant may request other expenses to be included, such as landscaping or janitorial services.
Advantages and Disadvantages of a Gross Lease in Real Estate
There are advantages and disadvantages of a gross lease in real estate. Understanding both sides helps you understand if it's right for you.
Occupancy Costs Are Out of Your Control
When you sign a gross lease, you promise to pay the fixed rent for the entire term. Even if you made energy-efficient changes to the commercial property or found other ways to decrease your utility expense, the landlord benefits by paying less in utilities but collecting the same amount of rent.
Your Rent Could Increase Over the Life of Your Lease
Most gross leases have a provision that allows landlords to increase the rental costs in certain intervals. Most commonly, this happens when utility costs or property taxes increase. The landlord can increase the rent to cover the cost. Some gross leases, however, can increase in specific increments even if other expenses don't increase.
Rent Rates May Vary From Month to Month
Some gross lease provisions allow a month-to-month change in rent. This is common for commercial leases where the tenant will have varying utility costs. For example, if your company uses air conditioning a lot in the summer, your utility costs may be higher. With a month-to-month provision, the landlord can alter the rent charges based on the utility costs.
A benefit of the gross lease is it makes it a lot easier to budget. You'll always know your rent costs if you don't have a provision that the rent can change monthly. Plus, you don't have to worry about variable utility costs, making it even easier to stick to a budget.
Only Pay For Your Space
When you have a gross lease, you only pay rent based on your unit's utility usage and all other property expenses. So you aren't sharing utility costs with other tenants and relying on their use of the utilities to be in line with what you use or can afford.
Help You Plan for the Future
Knowing your rent can help you make budgeting plans for the future. You don't have to worry about your rent changing; if it does, it will be at one fixed interval, which you can negotiate and subsequently budget for.
The only exception is if you have a modified gross lease and are responsible for a portion of the property taxes and other costs.
Gross Lease Real Estate Example
Gross leases will vary by landlord, but here's a simple example.
ABC Real Estate Company rents commercial space to businesses. They prefer a gross lease because it's simpler for everyone to manage. ABC charges a flat fee per square foot to rent each unit, and in exchange, they cover the property taxes, insurance, and all utility costs associated with the property.
In the lease, they allow cosmetic modifications to the building, but everything must be returned to ABC Real Estate, for example, if they changed the light fixtures. They also do not allow any major remodeling or modifications.
Things to Know About Modified Gross Leases
Some tenants and landlords prefer a modified gross lease. Here's what you should know to decide what's right for you.
MGLs Are More Common on Industrial Properties
Most landlords offer the modified gross lease on industrial properties, not other commercial properties. This is likely because industrial businesses have much more varied use of utilities versus businesses running an office, for example.
Read the Fine Print
The modified gross lease has many unknowns. The gross lease, for example, there is no guessing. You know you pay one flat monthly fee, and all or most expenses are included.
With a modified gross lease, there aren't any hard and fast rules. You know you'll pay a flat rent, but the other expenses are variable. For example, some leases include more utility and other costs than others.
Don't let yourself be unpleasantly surprised. Instead, read the fine print to determine what you'll be responsible for paying and what's included in the lease.
The In-Between Lease
The modified gross lease is an in-between lease. You aren't paying the full cost of the rent plus all monthly expenses, but neither is the landlord. However, you both pay a portion of the cost of running the property, and each MGL is different, so always know what you're responsible for paying.
The Rent Seems Cheaper Than a Full-Service Lease
Don't fall for the cheaper rent and assume you're getting a deal. Yes, the rent might be lower, but what other expense liabilities must you cover? That's the missing detail many tenants forget to understand. They see the lower rent and think they're saving money when that's not the case.
Get Help if You Need It
The modified gross lease can be confusing. It's best to have a commercial real estate broker or tenant representative help you understand the lease structure and what it will cost. The many variables that go into the lease can leave you with unpleasant surprises if you don't fully understand it.
Modified Gross Leases Aren't Always Modified Gross Leases
Modified gross leases have many names, including single net lease, double net lease, and triple net lease. They sound different, but the only difference is what you're responsible for covering.
Single net leases require the tenant to pay the rent and property taxes. Double net leases require the tenant to pay the rent, property taxes, and insurance, and triple net leases require the tenant to pay taxes, insurance, and maintenance costs.
Check for Meters
Ensure you're responsible for the property's utilities, have your own meter, and aren't paying for other tenants' utility use.
Differences in Leases
Understanding the difference in lease structure can ensure you make the right decision for your commercial lease.
Gross Lease vs. Net Lease: What's the Difference?
In a gross lease, the landlord pays all property expenses but includes the cost in the flat rent. Tenants don't have to worry about variable expenses and can easily budget. With net leases, however, the tenant pays some or all of the property costs, such as utilities, taxes, or insurance.
Gross Lease vs. Triple Net Lease: What's the Difference?
What does triple net mean in a lease? Unlike a gross lease, a triple net lease puts all responsibility of property costs associated with the property on the tenant. For example, most NNN leases require tenants to pay taxes, insurance, maintenance, and utility costs.
Gross Lease Real Estate: The Bottom Line
Gross lease real estate can be an easier way to budget the cost of renting and operating the property. Compare your options, though, and know the lease details, so you aren't unpleasantly surprised at your monthly expenses. Learn more by signing up and visiting our blog.
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