In commercial real estate, there are three distinct types of leases that are commonly used by landlords. One of those types is known as a full-service gross lease. Below is a guide to full- service gross leases. Read on to learn what this type of lease is, how it compares to the other two types of commercial leases, and the advantages and disadvantages of choosing this lease type. Armed with this knowledge, you should be able to decide if using a full-service gross lease is right for you.
What is a full-service gross lease?
Sometimes referred to as a "full-service lease" or a "gross lease," the term "full-service gross lease" refers to a type of lease structure where the landlord is responsible for paying all of the operating costs related to running the property. Though different setups can be negotiated, this usually includes operating expenses such as common area maintenance, real estate taxes, monthly utilities, and property insurance. In exchange, the tenant typically pays a higher base rent than they would if some of these expenses were their responsibility.
However, keep in mind that you likely won't be responsible for covering unlimited expenses. These leases are often negotiated with an expense stop written into the lease. Also known as an "expense ceiling," an expense stop is a limit on the total amount of expenses that will be covered by the landlord. Any expenses above that limit are typically passed on to the tenant and considered their responsibility.
Full-service leases are most commonly found in situations where there are multiple tenants in one building, like an office lease or retail lease. In this case, it's often difficult to discern things like utility usage between tenants. It's often easier for the landlord to take care of these expenses and to charge a base rent that covers these costs.
What are the three types of commercial real estate leases
In truth, most commercial real estate leases exist on a spectrum. Within that spectrum, there are three distinct types of leases. We've laid them out below to give you a better idea of which type of commercial lease might be the best fit for you.
Full-service gross lease
As explained above, with a full-service gross lease, the vast majority of the operating expenses fall on the landlord. Traditionally, this type of lease is said to be beneficial to the tenant. Since tenants only have to worry about paying base rent, it becomes very easy to plan for them to plan for their expenses.
On the other hand, with a net lease, most of the property's operating expenses are passed through to the tenant. Generally, these leases are said to benefit the landlord. However, there are three subtypes of net leases to consider:
- Single net lease: In a single net lease, the tenant agrees to pay the property taxes, but all other expenses fall to the landlord.
- Double net lease: In a double net lease, the tenant agrees to pay the real estate taxes and property insurance.
- Triple net lease: In a triple net lease, all of the operating expenses are passed through to the tenant, including property taxes, property insurance, maintenance, repairs, upkeep, and utilities.
Modified gross lease
Finally, there's a commercial real estate lease known as a modified gross lease. Essentially, a modified gross lease is considered to be a middle ground between full-service gross leases and net leases. In this case, the expenses that are to be covered by each party are negotiated on a case-by-case basis.
Advantages of a full-service gross lease
The biggest advantage of a full-service gross lease is that the amount of rent you can charge is almost always higher than it will be with a net lease. Since you, as the landlord, are responsible for covering the majority of the expenses to keep the property up and running, you can build those expenses into the base rent. Savvy landlords may even pad the rent a bit in order to protect themselves and their profit margins in the event of a cost increase.
You may also be able to negotiate an increase in the base rent that will occur over time. Since commercial real estate leases are usually much longer than residential leases, it's common for landlords to negotiate a percentage increase into the base rent every year. Typically, the increase is around 3% in order to account for inflation.
Disadvantages of a full-service gross lease
On the other hand, there are a few major disadvantages to choosing a full-service gross lease. The most obvious one is that there is more responsibility on the landlord. Since you're the one covering the cost of the operating expenses, you'll need to be much more involved in the upkeep of the property than, say, a landlord in a triple net lease, who bears none of the responsibility for the property's expenses and receives a rent check every month. Full-service gross leases are an investment of both time and money,
That said, depending on how the lease is structured, there's also a risk that the property's expenses could increase and cut into your profit margins. That's why it's so important to negotiate an expense stop if you're considering going with this type of commercial lease agreement. Otherwise, you could be on the hook for covering sizable expense increases.
The bottom line
As a landlord, it's important to weigh the advantages and disadvantages of choosing a full-service lease structure for your tenants. While it makes sense in select scenarios, in others, this type of lease could expose you to more risk and responsibility than you need to bear. With that in mind, use this post as your guide to full-service gross leases. Use the information above to help you decide if this type of lease is the right choice for you.
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