Gross Lease

A gross lease has the tenant pay one all-inclusive rent, while the landlord pays the building’s operating costs, taxes, and insurance. In office buildings it is often called a full service lease.

Who carries the risk

In a gross lease, the landlord carries the risk that operating costs rise. If taxes jump after a reassessment or insurance premiums spike, the landlord absorbs the increase for the rest of the term. Landlords price that risk into the rent, so gross rents are higher than NNN base rents for comparable space.

Pure gross is uncommon

Few multi-year commercial leases are fully gross. Most “gross” office leases are really modified gross: the tenant pays its share of increases above a base year or expense stop. A pure gross lease is most common for short terms, small suites, and executive suites.

Comparing gross and net offers

To compare a gross lease with a NNN offer, convert both to total occupancy cost per square foot:

NNN       base rent $22.00 + operating costs $9.00 = $31.00 per SF
Gross     rent $31.50 per SF, landlord pays operating costs

In year one the gross deal costs slightly more. Over a long term, if operating costs grow faster than the rent escalates, the gross tenant comes out ahead, because the landlord absorbs the growth.

What it means for administration

A pure gross lease needs no annual reconciliation, which makes it the simplest lease to administer. A portfolio mixing gross, modified gross, and NNN leases needs a system that handles each structure correctly.

See the triple net lease guide for the other end of the scale.