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Whenever you enter that negotiation stage for a commercial lease, you must learn a lot of different vocabulary that you may not understand. Otherwise, you can't figure out the contract. Though the jargon behind the commercial real estate lease for a commercial property can be highly complex, it's crucial to understand what the phrases mean.
That way, you have invaluable insights into the nature of the commercial lease. It may also help you to avoid poor lease terms that don't fit your needs or requirements.
One of the most crucial things to understand about commercial real estate is the type of lease you have. For example, gross leases are something that everyone must know. What is a gross lease when it comes to commercial real estate? Why should you think about having one? Should you get a net lease instead?
Learning about the differences between gross and net leases is the first step, and this is where you go to get all that information!
What Are Gross Leases?
With a full-service gross lease for commercial real estate, the tenant pays a single payment to the landlord. Rent is paid to occupy that space and cover other property expenses that could be associated with the property. These can include property taxes, insurance, and so much more.
Typically, this type of commercial real estate lease is the most common for office buildings and those with multiple tenants.
In general, a gross lease is a full-service lease, and all of the expenses are included. However, there could be other gross leases and options out there, too. They could leave you with similar liabilities as you might have with a triple net lease. This is where you promise to pay every expense for the property.
With that in mind, you should read your lease agreement carefully. Though understanding gross and net leases are crucial, this article focuses more on the gross lease instead of the net lease.
Things to Know
Expenses Could Vary
A gross commercial lease includes all the base rent with expenses, but they could vary between contracts. For example, it could contain maintenance, utilities, taxes, insurance, and all the rest. Before signing a gross lease, carefully review the expenses that are included. If you don't, you could face similar liabilities for property expenses that might come with a triple-net lease.
Though net releases like that can be beneficial, and property ownership stays the same, you should fully understand the implications of both the gross and net lease before signing anything.
Simplify Payments
Some companies like gross leases better because it's easier on the accounting team. With that, the tenant pays for most of the costs associated with the property, such as property taxes, and can do it all with one check.
Large companies often find this beneficial because they may have multiple leases and portfolios.
Ultimately, with a net release, you must pay for each expense separately (or sometimes as a group). Therefore, you could cut three or more checks each month.
Rent Rates Could Vary
While not common, some gross commercial leases give the landlord the right o change rents from month to month, which covers variable costs, such as utilities. With such a lease, the rent might be higher in the summer because you use more air conditioning. That type of clause reduces the advantages of using a gross lease, so it's best to negotiate the removal of that bit before signing.
Generally, property taxes, insurance, and similar amounts don't change, so the landlord is rarely allowed to change rent.
Even with net releases, the rent rarely changes because you're paying for specific things. However, some things are variable, such as maintenance. One month, you might pay more because a machine broke down, while the next month had little maintenance other than normal issues.
Rent Can Increase
In most cases, gross commercial leases let the landlord make rent escalations at particular intervals to cover those variable costs. Sometimes, the increases get tied to actual costs and only increase when expenses go up, such as property taxes. With that, the escalation could occur regularly and be a fixed amount that follows the movements of third-party indicators, such as the Consumer Price Index.
Again, net leases can have rent increase throughout the lease's lifespan, as well. Therefore, there isn't much of a difference between the net lease and gross lease.
Occupancy Costs Vary
One huge downside of gross commercial leases is that the occupancy costs are often out of control for the tenant once the documents are signed.
For instance, you pay a flat rate for the utilities. Then, you decide to add a smart thermostat or LED light figures to save energy. Though you're helping the planet, you don't lower your rent costs unless you can renegotiate with the landlord.
Plan for the Future
One good thing about gross leases is they can make it easier for you to forecast and budget for the future. You pay a fixed rate for the rental each time, so you can factor in those costs. However, the exception here is if your landlord puts in stipulations that can raise the rent with time.
Generally, the landlord is required to tell you when rent is to increase. If it is indicated in the agreement, though, it is your responsibility to keep track of it. You may ask the landlord or property manager to send an email or text reminder, and they should do so as a courtesy to you.
Pay Only for the Space
Many tenants like gross leases because they are only required to pay for maintenance, utilities, and other expenses associated with the property they occupy. If you rent one area of an office building, you only pay for what you use. The landlord must cover the rest.
However, this can get tricky, especially when the landlord has many tenants. Therefore, it's best to understand the terms outlined in the rental agreement. Make sure that the math is correct and find out from the landlord how many units are rented and figure everything out yourself. That way, you know that you're not overpaying for the space.
Reasons to Consider a Gross Lease
Most landlords try to transfer maintenance expenses and all the rest to tenants with a triple net lease structure. Therefore, a gross lease structure is often harder to find.
Still, some landlords feel that gross leases are beneficial to the customer (tenant) and want to make it enticing for them to rent from that entity or person. Others never moved away from the gross lease situation.
Though a gross lease might appear to be more expensive initially, there are compelling reasons to choose it over net leases when provided to you.
Transparent and Predictable
One of the best reasons to lease space on a full-service gross lease basis is you know exactly what you spend. The rent is yours. Though there could be variable costs to make it change, you still know how it is modified with time.
For example, if the property taxes go up, you have a spike in building repairs, or utilities skyrocket, those expensive issues must be dealt with by the property owner instead of you. When you combine gross leases with pre-defined increases, you see long-term visibility into your costs.
Could Be a Better Deal
Sometimes, having a gross lease is just a better deal. One big marketing challenge for a gross lease is that it looks so much more expensive than a net lease. You want to pay $21/SF for rent instead of $33!
However, that $33 gross lease is much better than the $21 triple net lease for office buildings because the triple net lease has $13 in maintenance costs and other expenses. Therefore, the gross lease is less expensive overall. It's common to find that this is true.
With that, the gross lease is often offered by the less sophisticated property owner, though this isn't always the case. Working with a mom-and-pop property owner has challenges, too. However, it might mean that they priced the building below the rental market value.
It's best to speak with a tenant representative to identify these situations so that you can take advantage of them when they are available.
It's Your Only Option
Ultimately, the best reason to focus on the gross lease structure is that there's no other choice. You might find a space that fits all of your needs beautifully, and the building works for the business at a total cost fitting into your budget. Therefore, the lease structure might not be that important.
If the landlord wants to use a gross lease structure instead of single-net leases or double-net leases, it could help you to think about the request. You may be able to get a better deal on the business points that matter, such as utility costs or operating costs associated with that property.
With that, a gross lease could be the only way to get the right space for your business.
Modified Gross Lease vs Triple Net Lease
It's important to note that there are many gross lease types. You just learned about the full-service version, and it can be highly beneficial. However, modified gross leases are also available.
Typically, a modified gross lease is somewhere between a triple-net lease and a full-service gross lease.
Understanding a Modified Gross Lease
Usually, the commercial real estate industry splits the costs associated with running a building into three areas: insurance, taxes, and operating expenses. Typically, operating expenses are a broad topic that can include the utilities billed to the whole building, maintenance and repairs, management, and almost anything else that your landlord pays for on the property.
Generally, a modified gross lease means the landlord and tenant divide these expenses. You could pay for the operating costs, and the landlord covers the insurance and taxes. This is often called a single net lease, which is different from a triple net lease where you must pay for all three things.
When It Isn't Clear
Generally, that definition is straightforward, but the usage of the term within the industry can get confusing. You could find a landlord who quotes you the full-service rent and includes expense stops while calling it a modified gross lease.
With that, you pay a flat rate for rent, but when the building expenses (which could be anything) go over a specific amount per SF, you must pay the difference. Alternatively, the landlord may calculate modified gross leases differently than others.
Similarly, one building could quote a modified lease with all expenses included. The one next to it could have a lower modified gross rent and add additional expenses.
The nature of the modified gross lease means it's hard to compare it with other net lease options and the rest. With triple net leases, you pay everything, and with a full-service lease, the landlord pays it all. Modified gross leases mean that things change, and you must read and understand the fine print before signing.
What to Know
Seeing as MGLs can be quite confusing, you must understand a few key points about them before you enter into an agreement. Here's what to know about modified gross leases:
The In-between Lease
The best way to grasp the modified gross is to understand that they're an in-between lease option. With your full-service gross lease, you pay the rent, and the landlord covers everything else. For triple net leases, you pay the rent and some of the operating expenses. However, with a modified gross lease, you pay the rent and cover some of the taxes, operating costs, and insurance, while the landlord does, too.
Rent Seems Cheaper
With triple net leases, it's crucial to check the CAM charges. However, modified gross rents are often closer to the full-service rents. Therefore, you must determine what the expense liabilities are to avoid surprises later. Choosing the right tenant representative is crucial because they check it for you.
Not Always What They Seem
Depending on the market, the modified gross lease might be called a different term. Industrial gross leases, single-net, and double-net leases all fit into the category of the MGL.
Check for Meters
With the full-service space, electricity is often included in the rent. However, with triple net leases, it isn't included, and you have your own meter and must pay that bill directly to the company. Usually, you pay the water and gas bill, as well. Therefore, with an MGL, it's hard to forecast what might happen, so always speak to your landlord and keep your eyes open.
Must Read Fine Print
A modified gross lease is very unpredictable. When you hear that commercial properties are modified gross, you really can't be sure of anything. You just know that you must pay rent and some other costs associated with the building. To understand what the property costs, you've got to review all of your lease documents thoroughly and have a good understanding of the condition, utilities, and features of that building.
Get Legal Assistance
With all the complexities associated with a modified gross lease, you should hire a qualified tenant representative to help with the process. They can find commercial properties for you and negotiate the lease when the time comes.
It's a good idea to use a tenant rep or a specialized real estate broker who understands the commercial side. That way, you comprehend the implications of the lease and don't have any surprises or headaches to deal with later.
Conclusion
When determining what retail properties work well for your needs, it's crucial to understand the real estate terminology. Generally, a gross lease means that you pay your rent and various other expenses, such as utility costs or building insurance. However, you just write one check to cover it each month.
This one lump sum payment is always the tenant's responsibility. However, full-service leases are much better than triple net leases because you can talk to the landlord and negotiate the taxes and insurance (and additional costs) with a gross lease.
There's no one-size-fits-all situation, so the type of lease you have is based on various factors. Now that you understand the gross lease situation, you can determine if it's the best scenario for you!
