Commercial Gross Lease: 4 Points You Need To Know

There are two ways a landlord can rent out a commercial property. He can either ask that the tenant pay just for the space of the estate and all other expenses such as taxes, utilities and insurance are paid by him as an extra expense. Or he can request that the tenant pay for the space and all other expenses are included within the rental agreement which is called a Commercial Gross Lease.

Key Points:

• Get into the details - The more you know the more profitable your decision will be
• Research and then more research 
• Be patient and seek guidance

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4 things you need to know about gross commercial leases

1. Gross lease real estate term lengths

The term length of a gross lease can vary from three to five years or shorter. This lease agreement is typically shorter than usual lease lengths, as the landlord takes on much of the risk. It is not uncommon to draft a 12- or 18-month term length for a gross lease. 

2. Lease amount and lease increases

It is important to assess the lease amount. It is advisable to consider rates for similar spaces. If you discover that the lease rate is too high, consider lowering your asking price. If you receive many inquiries, you may want to consider increasing your rate. 

Commercial landlords typically add an annual rent increase into the lease terms. You may want to consider this when deciding how to invest in commercial real estate. It is also important to note that rent and lease are distinct, as rent generally means a monthly contract.

3. Property alterations

Property owners need to consider modifying or customizing areas for tenants using a design-build or build-to-suit contract. If you ask for a sizable sum of rent for your market, you might want to allow for property alterations at no extra cost and request that the tenants sign an extended lease agreement.

4. Subleases

Decide whether or not you wish to offer tenants the possibility to sublease their space to a different business company. This term is useful in less fierce markets. Sometimes a tenant might be considering a replacement tenant that is happy to complete the final stages of the lease. When allowing for subleases, there are legal matters to consider, so make sure you consider these terms carefully if you permit them.

The pros and cons of a commercial gross lease

Here are the pros and cons of types of commercial leases:

Pros of a gross lease

This kind of lease tends to favor the tenant as it assures that there will be no unexpected expenses. This way, the tenant can budget appropriately. The tenant only needs to focus on the base rent. 

Tenants favor a gross lease as it lets them attend to running their company without focusing on the building’s state. The benefit for you as a landlord is that you can probably charge a greater per-square-foot rate as the rent is all-inclusive. 

Cons of a gross lease

This type of lease demands that the landlord be more attentive, as they are entirely responsible for the upkeeping of the physical state of the building and it's associated systems. This lease is not the best possible situation for a commercial property owner seeking a passive investment. A solution could be for the property owner to hire a property manager.

Certain tenants might not favor a gross lease as they have minimal influence over the general appearance of the building and no say over when maintenance is done. They could also be subject to greater rent than with different kinds of commercial leases.

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