While the structure is less common than it was many years ago, if you can find a suitable space under a gross lease structure, you might feel pretty lucky. Most tenants perceive a gross lease as a good deal since they pay a single rent and the landlord is supposed to take care of everything for them. In actuality, though, gross leases can be more complicated than they seem. Here are some important factors to keep in mind.
Gross Isn't Always Full Service
When you think of a gross lease, you might actually be thinking of a full-service gross lease. In a full-service lease, the landlord pays for everything (subject to some limitations discussed below). However, a modified gross lease is also a gross lease, and under that agreement, you will have to pay some of the building's operating expenses.
Furthermore, bear in mind that the definition of "full service" varies from building to building and market to market. While you can usually expect to have taxes, water, and common area amenities included, some necessary services (like communications) are almost never included and others (like janitorial and utilities that are separately metered for the unit) may also be excluded from the landlord's responsibilities.
Check for Base Years and Expense Stops
If your full-service gross lease has base year or expense stop provisions, then you could end up having to pay for your operating expenses -- at least if they are higher than at a preset point. For instance, if you sign a full-service gross lease at $50 per foot with a $15 expense stop, this means that as long as the building's expenses stay under $15 per foot, all you will have to pay is your $50. If they go up to $16, though, then you'll have to pay that extra dollar. A base year is similar but instead of setting a dollar amount, it sets the building's expenses during a specific year (usually close to the year you sign your lease) as the amount that the landlord will pay. This means that when expenses go up, you will pay the overage.
These clauses have a double whammy. They mean that you have the same exposure as a triple net lease since your occupancy costs go up with expenses -- just like a net lease. However, they also mean that if expenses go down for some reason, there's a floor to how low your occupancy cost can go because once the extra charges go away, you are still left at your full-service rent.
Identify Hidden Costs
In addition to all of the fine print that comes with a gross lease, there are other expenses that your landlord can also still levy against you. You may have to pay extra for signage if you want it. Next, many buildings have limited hours and bill you for access to the elevators or for HVAC service outside of those hours. If your people come in early, work late, or work the weekends, these charges can add up quickly. Finally, there might be other terms in your lease that could limit how you use your space or hit your with additional expenses. Requiring you to use your building's ground floor restaurant as a caterer (this happens!) could mean that you spend more for inferior office lunches, for example. While these types of rules might seem minor, their impacts can add up.
Don't Forget Parking!
Finally, realize that if you have a gross lease and aren't in a building with free parking, you will probably have to make a separate arrangement to find a place for your employees and visitors to park. In and of itself, the gross lease structure does not include parking. As such, it's important to remember to negotiate for that upfront.
Here are a few other articles we know you'll enjoy:
What is Tenant Representation?
How to Know if a Short-Term Lease is for You
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