November 20, 2019
Don Catalano
In this article, you'll learn:
In an age where landlords have moved to transferring the expenses of running the building to tenants through triple-net lease structures, the gross lease might seem hard to find. However, some landlords are realizing that gross leases are desirable to their customers -- tenants -- while others have never moved away from it. While a gross lease structure might seem more expensive up front, there are actually compelling reasons to choose one if you have the opportunity.
The term "gross lease" means that your monthly payments to your landlord are grossed up by the inclusion of at least some of the building's expenses. In a full service gross lease (which is what people typically mean when they say "gross lease"), pretty much every expense is included. In other types of gross leases, though, you could end up with almost the same liability as you would under the triple-net lease. With that in mind, it's very important to read the lease carefully. For the purpose of this piece, though, we will assume that you are considering a full service gross lease moving forward.
One of the best parts of leasing space on a full service basis is that you know what you're going to spend. Your rent is your rent. And, barring any expense stops or base year provisions, you know how it will change over time. If utility costs go up, building repairs spike or property taxes get reassessed, all of those potentially expensive issues are the landlord's problem instead of yours. Combining a gross lease with pre-defined increases lets you get long-term visibility into your occupancy costs, as well.
Sometimes, a gross lease is a better deal. One of the marketing challenges of a gross lease is that it looks more expensive than a net one. After all, you'd rather pay $21 per square foot in rent than $33, right? However, if the $33 lease is a gross one and the $21 is a triple net lease in a building with $13 in CAMs and other expenses, the gross lease is actually less expensive when you compare the two on a truly apples-to-apples basis. It isn't uncommon to find that this is the case, by the way.
In addition, the gross lease is frequently (but not always) offered by less-sophisticated landlords. While working with a mom and pop owner can have its own challenges, it could also mean that they are pricing their building below market. Your tenant representative can help you identify these types of situations if you are lucky enough to come across them.
The best reason to choose a gross lease structure, though, might be that you have no choice. If you find a space that suits your needs in a building that works for your business at a total cost that fits your budget, is the lease structure really that important? Ultimately, if the landlord insists on a gross lease structure, acquiescing to that request could help you to negotiate a better deal on other business points. it might also be the only way that you can get that perfect space.
