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Analysis of Commercial Gross Leases and
Gross Commercial Leases
Under a gross lease the tenant pays a predetermined rent
amount each month without any adjustments for increases in
the operational costs of the commercial project or pass-through
to the tenant for operational expenses incurred by the owner.
While expenses related to the owner’s operation of the
development such as taxes, insurance, maintenance, and
utilities may be factored into the calculation and determination
of the periodic rent amount that the tenant will pay, there is no
mechanism for adjusting the amount the tenant contributes to
these operational expenses of the project. Therefore the
monthly rent amount and the amount that the tenant will
contribute to the operational expenses throughout the term of
the lease are determined when the lease is negotiated; though,
of course, this rent amount may be subject to change during
the term of the lease in a predetermined manner such as
periodic set increases in this rent amount.
Tenants prefer gross leases because it provides certainty as to
their operating expenses and unexpected operating costs for
the project are all absorbed by the owner. However gross
leases are not favored by owners because they must absorb
these unexpected costs of operation even though the tenant is
the one occupying the space day-in and day-out and therefore
they are in the best position to minimize maintenance and
operational expenses. Under a gross lease the tenant has no
economic incentive to minimize operational expenses because
the owner absorbs all such costs. This can manifest itself in
many ways such as inattention to situations requiring
maintenance or inordinate number of service calls to third party
service providers such as landscapers or parking area
maintenance and sweeping.
Because all of the risk for increases in the operational
expenses is taken by the owner of the development, gross
leases are generally for shorter time periods with less time for
unexpected costs to be incurred by the owner. If they are for
longer periods of time then periodic increases in rent are
desirable for the owner to at least attempt to capture
appreciations in market rental rates and possibly account for
potential increases in operational expenses for the project.
Return to Analysis of Commercial Gross and Net Leases
Law Office of
Craig W. Little, P.A.