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.