Monday, October 3, 2016

Real Estate & Related Terms Explained: Gross Lease

 As we continue on in our series of explaining real estate related terms, the streak of leasing-related topics continues. Over the last few weeks we have discussed triple net leasing and some related terms. Today we are going to touch on the opposite end of the spectrum when it comes to leasing… gross leasing.

What Is A Gross Lease?
A gross lease is a type of lease where the Landlord pays for the building’s operating costs, including the property taxes, insurance, maintenance, etc. From the Tenant’s perspective this equates to a flat fee or monthly rent in exchange for using the space. This is the opposite of how a triple net lease is administered, where the Tenant pays their proportionate share of the building’s operating cost.

How Is A Gross Lease Administered?
A gross lease is either administered as $/ft figure (ie $10.00/ft), or as a flat dollar amount per month ($2000/Month). Obviously from a Tenant’s perspective, a gross lease is simpler as the cost every month is fixed. Naturally, some Tenants prefer this type of lease arrangement, compared to triple net leasing.

What Else Should I Know About Gross Leasing?
Gross leases can sometimes include utilities cost and sometimes they are separately metered. It is important to understand how utilities are charged in the gross lease deals you are looking at. As a Tenant in a gross lease building, even though you aren’t paying additional rent to cover your share of operating costs, you will want to also ensure that the maintenance of the property has been kept up (landscaping, snow removal, etc). This can be done with language speaking to this in your lease agreement.

Sometimes you will run across a building that is run somewhere between a net and gross lease arrangement. These can be referred to as semi-net or semi-gross leases with an adjustment for part of the operating cost (ie. property taxes or utilities). The Landlord will set up a gross lease, but charge you back for your share of utilities or property taxes. Your lease agreement should speak to any special arrangements like this.

On the Landlord side generally lenders and other investors won’t view investment properties with gross leases as favourably. As opposed to net leasing where the Landlord is collecting a net rent yearly, with gross leases the Landlord is responsible for the expenses. This can lead to variability in the net income of the property and therefore leads to a lower applicable cap rate (valuation) when selling or financing the property.

Now you know the difference between a gross and a net lease. If any of these concepts are still confusing for you, feel free to drop us a line. We are here to help!

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