A gross lease is a rental agreement where the tenant pays a single flat fee that covers rent and operating costs.
Knowing how gross leases work in real estate is essential to passing the licensure exam. To ensure your success on the big day, we recommend learning from trusted real estate experts. As someone who has spent years working in the field, I’m here to provide you with all the information you need to know about leases.
In this post, we’ll define gross leases, provide helpful examples, and discuss their advantages and disadvantages. Keep reading for more information!
What Is a Gross Lease?
A gross lease is a contractual agreement where the tenant pays one fee that covers rent and operating expenses. This means the landlord is responsible for paying any of the property’s additional expenses. Of course, this can vary depending on the gross lease type and the contract’s exact terms.
Examples of additional expenses included in a gross lease include:
- Property taxes
- Property insurance
- Maintenance costs
Why Is It Called a Gross Lease?
The term “gross” means a total amount without any deductions of tax or other contributions. A gross lease earns its name because tenants pay one price for rent without worrying about property taxes and other expenses.
What Are Gross Leases Used For?
Gross leases are generally used for commercial real estate. Commercial real estate refers to properties that lessees rent for business use.
Examples of properties that may be rented with a gross lease include:
- Office buildings
- Assembly plants
- Retail centers with multiple tenants
- Industrial properties
The Two Types of Gross Leases Explained
Real estate students must understand the differences between the two types of gross leases:
- Modified gross lease
- Full service gross lease
Modified Gross Lease
A modified gross lease is an agreement where the tenant pays base rent plus a proportional share of operating expenses. In a modified gross lease agreement, the property owner and tenant are both responsible for covering extra costs.
Modified gross leases are the middle ground between a gross and net lease. Because tenants pay extra for operational upkeep on a property, the rent for a modified gross lease is often a little less.
This type of commercial lease is generally used for office buildings and spaces with multiple tenants.
Full Service Gross Lease (Fully Service Lease)
A full service gross lease is a rental agreement where the tenant only pays base rent. The property owner pays all operating expenses, including utilities, maintenance, insurance, and property taxes.
Full service gross leases provide tenants with one predictable bill to pay each month. Many tenants prefer this because they do not have to pay any additional costs. However, landlords often charge higher rent prices on this type of lease to ensure they don’t go broke paying property expenses.
When to Use a Modified Gross Lease vs. a Full Service Lease
Tenants who are interested in paying less for rent may prefer signing a modified gross lease agreement. While they still have to pay for a portion of other costs, they can lower these prices by using utilities less often and keeping their property well-maintained.
Tenants who are interested in paying one flat fee every month may prefer using a full service lease. Because this lease type only asks the tenant to pay for rent, they never have to worry about changing prices due to variable costs.
What Terms Should a Gross Lease Cover?
Forbes tells us that all lease agreements should include the following items:
- Names of each tenant living in the rented space
- Limitations on who can occupy the space
- The term
- Rent amount, payment method, and billing schedule
- Deposits and fees
- Maintenance, repairs, and operational costs
- Legal rights of access
- Illegal activity restrictions
- Pet restrictions
- Any other restrictions
Pros and Cons of a Gross Lease
Let’s discuss some pros and cons of gross leases for landlords and tenants.
Landlords who use gross leases can charge higher prices for rent. They also have the power to opt for energy-saving equipment, lowering the cost of operating expenses.
Tenants who sign gross lease agreements only have to worry about making rent payments. They pay the same fixed fee every month with no surprises. They also have fewer responsibilities, as they do not have to worry about taxes, insurance, or maintenance. If something breaks on the property, the landlord is required to fix it.
Check out our table for a clear visual of the pros and cons of using a gross lease:
|Pros of a Gross Lease for Tenants
|Cons of a Gross Lease for Tenants
|Pros of a Gross Lease for Landlords
|Cons of a Gross Lease for Landlords
|Pays One Fixed Fee
|Rent Payments Are Generally Higher
|Can Charge More for Rent
|Cannot Charge Higher Rent Even if Operating Expenses Increase
|Has Fewer Responsibilities
|Can Earn More Using Energy-Saving Tools
|Responsible for Timely Payments and Late Fees
|Not Responsible for Maintenance and Repairs
|Can Pass Inflation Costs to the Tenant
|Tenants Can Use Utilities Freely and Increase Operating Costs
Examples of Gross Lease Structures in Real Estate
Coworking office spaces are one of the best examples of when a tenant may sign a gross lease. Under this agreement, tenants can rent a desk or office space for one flat fee. Generally, tenants in these conditions have access to amenities such as meeting rooms and free internet service.
In this case, it makes sense to sign a gross lease, as the tenant should not have to pay taxes and insurance for a property that they occupy with others.
Another typical example of a gross lease in real estate is apartment buildings. Tenants can sign a lease for an apartment and pay the same rent price for the entire term of the lease.
What Is the Difference Between a Gross Lease and a Net Lease?
While a gross lease requires property owners to pay operating expenses, a net lease requires that tenants pay. The expenses that tenants pay for in a net lease depend on which type of lease agreement they have signed.
For example, there are three primary types of net leases in real estate:
- Single net lease
- Double net lease
- Triple net lease
Each variation of the net lease requires the tenant to pay for different operating expenses. For example, tenants who sign a single net lease only have to pay for rent and taxes, while tenants who sign a triple net lease pay for everything.
This is quite different from a gross lease, which ensures the landlord is responsible for all of these costs.
When to Use a Gross Lease vs. a Net Lease
For a tenant, a gross lease is typically the best option. Because the landlord pays for all the expenses, the lessee can make fixed payments without worrying about additional fees.
For a landlord, a net lease is generally the better choice. The landlord is not responsible for utilities and other expenses in a net lease. For this reason, triple net agreements are the least risky lease agreement for lessors.
Are There Other Types of Leases in Real Estate?
Gross and net leases aren’t the only options tenants have when looking for commercial property. Examples of other commercial real estate leases include:
- Operating leases
- Capital leases
- Absolute net leases
- Bond net leases
Frequently Asked Questions about Gross Leases
Let’s answer some frequently asked questions real estate students have about how gross leases work in real estate.
Modified Gross Lease vs. Triple Net Lease: What’s the Difference?
In a triple net lease, tenants are responsible for paying all operational costs related to a property. This includes property insurance, taxes, and maintenance.
In a modified gross lease, tenants only have to pay some operational costs. The responsibility for these expenses is split between the landlord and tenant.
Net leases generally feature lower rent prices than gross leases, but rent prices for gross leases are more stable. In commercial real estate, triple net leases are used more often than gross leases.
Why Are Gross Leases Popular in Commercial Real Estate?
Many businesses prefer to use gross leases because they simplify the accounting process. With a gross lease structure, business owners know exactly how much they will pay in rent every month. They can cleanly account for this expense without worrying about extra costs like taxes and insurance.
What Is the Difference Between the Lessor vs. Lessee?
A lessor is a property owner who rents their space to families looking for housing or businesses looking for office space. Lessors are commonly referred to as landlords in real estate.
A lessee is a person, family, or business renting a property from a lessor. Lessees are commonly called tenants in real estate.
What to Know Before the Real Estate Exam
A gross lease is a rental agreement where the lessee pays a fixed fee that covers rent plus operational costs related to a property.
Real estate students must understand how gross leases work before taking the exam. A gross lease is among the most common in real estate, as it allows tenants to pay one fee for both rent and expenses. Now that you understand this concept, you’re that much closer to acing the test.
Of course, gross leases aren’t the only topic you’ll need to be an expert on to ensure a passing grade. Check out other vital terms using our online Real Estate Flashcards today!