SS160: What is a Gross Lease in Real Estate

SS160 What is a Gross Lease in Real Estate

Leases vary widely by property type and the tenants’ proposed use of the property. In this episode, Charles discusses gross leases and when they are utilized in residential and commercial properties.

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Talking Points:

  • There are several different types of commercial leases, one of them being a Gross Lease, also known as a Full-Service Lease.
  • With a gross lease, the tenant pays a flat rental fee for using the space. The landlord pays for all expenses associated with the property, including taxes, insurance, utilities, common area maintenance, and repairs. Landlords include the costs associated with the space in the flat fee they charge the tenant.
  • Gross leases are typical with office buildings and specific retail spaces. The first office I rented was a gross lease, where I paid one flat fee for using the unit, and the only additional fee I paid was for my internet; you will sometimes see gross leases cover WIFI as well, but this one didn’t.
  • There are 2 main types of gross leases:
    • First is the modified gross lease, which is a hybrid between a gross lease and a net lease. A net lease is a lease where the tenant covers all costs and expenses. The modified gross lease might state that the tenant is responsible for specific expenses while the landlord covers certain other expenses and utilities. For example, a tenant is responsible for their electricity, but the landlord covers all other expenses, including water. This is more common in older buildings where the water cannot be sub-metered easily. At the same time, it is much easier to separate electricity, making it typical for landlords to do so.
      • Years back, with a mixed-use building of mine, I rented out an office, and the lease was a modified gross lease since it stated that the tenant only had to cover their electricity, while I, as the landlord, would cover all other expenses.
    • The next type is a full-service lease. This type of gross lease is the simplest since the landlord covers all expenses of owning and operating the property while the tenant needs to pay one flat monthly fee.
  • There are several advantages and disadvantages of gross leases:
    • The landlord can charge a higher amount since they are simplifying the tenant’s life by wrapping all property costs into one flat fee.
    • The landlord is also assuming more responsibility. If there are maintenance issues, unexpected costs, or if the tenant uses more utilities than expected. (Some gross leases may have an expense clause that states tenants must pay for utilities over a specific amount).
    • The landlord also has increased their administrative duties for dealing with additional bills, vendors, and contractors that might not be required with a net lease arrangement.
    • For tenants, the rent is fixed; there are no other requirements on their end, and their bookkeeping is simplified, along with having the ability to budget accurately throughout the lease’s lifetime.
    • Tenants might pay a higher rent than they would pay in a net lease arrangement, along with the possibility of having an unresponsive landlord who may not prioritize property maintenance.

Transcript:

Charles:
Welcome to Strategy Saturday; I’m Charles Carillo and today we’re going to be discussing what is a gross lease in real estate.

Charles:
Have you always wanted to invest in real estate, but didn’t have the time, didn’t know where to find the deals, couldn’t get the funding and didn’t want tenants calling you. Since 2006, I’ve been buying income producing properties and great locations that provide us with consistent passive income. While we wait for appreciation in the future and take advantage of tax laws while we’re waiting and unlike your financial advisor, we invest alongside our investors in every property we purchase. Check out to investwithharborside.com. If you like the idea of investing real estate, if you like the idea of passive income partner with us at investwithharborside.com, that’s investwithharborside.com.

Charles:
There are several different types of commercial leases, one of them being a gross lease, also known as a full service lease. With a gross lease, the tenant pays a flat rental fee for using the space. The landlord pays for all the expenses associated with the property, including taxes, insurance, utilities, common area maintenance and repairs. Landlords include the cost associated with the space in the flat fee when they charge the tenant. Gross leases are typically with office buildings and specific retail spaces. The first office I rented was a gross lease where I paid one flat fee for using the unit, and the only additional fee I paid was for my internet. You will sometimes see gross leases cover wifi as well, but this one didn’t. Now there are two main types of gross leases. First is a modified gross lease, which is a hybrid between a gross lease and a net lease. A net lease is a lease where the tenant covers all the costs and expenses. The modified gross lease might state that the tenant is responsible for specific expenses while the landlord covers certain other expenses and utilities.

Charles:
For example, a tenant is responsible for their loan electricity, but the landlord covers all of their expenses, including water. And this is more common in older buildings where the water cannot be sub-metered easily. At the same time, it is much easier to separate electricity, making it typical for landlords to do so. Now, years back with a mixed use building of mine, I rented out an office and the lease was a modified gross lease since it’s stated that the tenant only had to cover their electricity while I as a landlord would cover all the other expenses. Now the next type is a full service lease. This type of gross lease is as simplest since a landlord covers all expenses of owning and operating the property while the tenant needs to pay only one flat monthly fee. Now, there’s several advantages and disadvantages of gross leases. The landlord can charge a higher amount since they’re simplifying the tenant’s life by wrapping all the property costs into one fat flat fee.

Charles:
Now, the landlord is also assuming more responsibility if there are maintenance issues on expected costs, or if the tenant uses more utilities than expected. Now, some gross leases may have an expense clause that states tenants must pay for utilities over a specific amount. Now, the landlord also has increased their administrative duties for dealing with additional bills, vendors and contractors that might not be required with a net lease type arrangement. For tenants, the rent is fixed. There are no other requirements on their end, and their bookkeeping is simplified along with having the ability to budget accurately throughout the leases lifetime. The tenants might pay a higher rent than they would in a net lease arrangement, along with the possibility of having an unresponsive landlord who may not prioritize a property and its maintenance. So I hope you enjoyed. Please remember to rate, review, subscribe, submit comments and potential show topics@globalinvestorspodcast.com. If you’re interested in actively investing in real estate, please check out our courses and mentoring programs@syndicationsuperstars.com. That is syndication superstars.com. Look more to look forward to two more episodes next week. See you then.

Announcer:
Nothing in this episode should be considered specific, personal or professional advice. Any investment opportunities mentioned on this podcast are limited to accredited investors. Any investments will only be made with proper disclosure, subscription documentation, and are subject to all applicable laws. Please consult an appropriate tax legal, real estate, financial or business professional for individualized advice. Opinions of guests are their own information is not guaranteed. All investment strategies have the potential for profit or loss. The host is operating on behalf of Syndication Superstar, LLC, exclusively.

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