How to Know if a Gross Lease is Right For You

Triple net leases and their variants transfer all of the costs of running a building to tenants. However, another alternative — the gross lease — is starting to come back into the commercial real estate world. It offers both real benefits and real drawbacks, so understanding its implications is key to finding the right space at the right cost.

In a gross lease, you pay a single rent rate. Typically, the gross rate is much higher than the “net” or “triple net” rate because there gross leases don’t come with a second set of common area maintenance (CAM) payments. Your gross rent includes the cost for occupying the building, the cost for operating your space, and other landlord expenses like taxes and insurance. Because all of these costs are built in to your rent, you can usually expect gross lease payments to be more stable than those on net leases. Including the benefit, of stability, there are three primary reasons that you might seek out a gross leased building.

You Are a Heavy Consumer of Building Services

With a net lease, you pay for what you use as you use it (at least on an annual basis). In a gross lease situation, everything you use is built into your rent. If your employees, for example, use more water than is typical, that cost will be absorbed by the landlord.  Heavy repair costs, high utilization of janitorial services, and even high electrical usage could make a gross lease where all of these costs get built in a much more desirable option.

Stability Is More Important Than Savings

When you gross lease your space, you know what it will cost. Your landlord charges you a set rental rate and, barring other charges like parking, that is all you pay. In addition, since most leases also spell out how they will increase over time with either fixed dollar increases (50 cents per foot per year, for example) or with fixed or capped percentage increases (examples include 2 percent per year or the consumer price index, capped at 3 percent per year), you can get a good sense of what your lease will cost over its entire life.

Bear in mind that this stability can carry a cost. You pay for the building’s services whether or not you actually use them. Furthermore, you lose the ability to participate in cost reductions. If your landlord renegotiates his elevator maintenance contract and saves thousands of dollars per year, that goes in his pocket, not yours. Opting for a gross lease structure smooths out your occupancy costs, but it can mean that you pay more instead of paying less.

A Gross Lease is Your “Only” Choice

Ultimately, this might be the only determinant as to whether or not you sign a gross lease. If you are in a community where they are prevalent, you will probably end up signing one, and if you are in a community where net leases are the norm, you will end up with one of those. This also applies to buildings. While it’s true that leases are always negotiable, in reality, if a landlord strongly prefers net leases (or gross leases) you will probably have to sign one if you want to occupy one of his or her buildings. At that point, you and your tenant rep have to decide if the benefits that being in that particular building outweigh the detriment of signing a lease that is not in the form that you prefer.

Originally published on April 19, 2020 by our good friends and colleagues at iOptimizeRealty. The original post can be found HERE.