What is an Explanation of a Commercial Gross Lease?

Many offices are leased on a gross basis.

A running joke in the real estate industry is that full-service leases are called "gross" leases, because that's how landlords feel about them. Landlords dislike these leases due to the fact that they allow the tenant to pay a single flat rate for their space, leaving the landlord to pay all of the building's operating costs and absorb any increases in such costs.

Tenant Expenses in Gross Leases

The primary thing a tenant pays for in a gross lease is rent, which is usually calculated as a flat rate per square foot. In addition to rent, tenants typically pay for their communication services as well as any ancillary services in the building, such as parking or signage rights. In addition, tenants may also pay a load or core factor, which is additional rent paid on their share of the building's common areas, such as hallways and restrooms. These load or core factors (the name depends on the area of the country) are typical, regardless of whether the lease is gross, net or something in between.

Landlord Expenses Under a Gross Lease

Landlords pay for just about everything for their gross-leased tenants, including the building's property taxes, management and maintenance. In addition, gross leases typically include water, sewer, garbage, gas and electric service at a flat rate, regardless of how much or how little the tenant uses. Finally, gross leases in office buildings frequently include in-suite janitorial services provided by the landlord.

Gross Lease Escalators

To protect themselves from increasing expenses, as well as to generate revenue growth, most landlords place some sort of escalator in their gross leasing arrangements. A standard escalator tied to either a flat percentage or the consumer price index is common. In addition, landlords may use some sort of "expense stop." This is a provision that says the gross lease includes a set amount of expenses on a per square foot basis, but if these expenses exceed the amount, the tenant will pay the overage. They can be tied to a certain year's expenses, called a "base year expense stop," or to a cost per square foot, regardless of what may have happened in the past.

Other Lease Types

Buildings are not only leased on a full-service gross basis. The triple net lease, which is the opposite of the gross lease, is the opposite in that it leaves the tenant responsible for both operating and, at times, capital expenses in addition to their rent. There are also a number of in-between lease types, such as industrial gross or modified gross leases, which allocate some expenses to the landlord and others to the tenant.