The Gross Lease in Commercial Real Estate
The Landlord Usually Foots the Bill for All Expenses
Though some sources break out the full-service lease type from the gross lease in commercial real estate, they are more often the same. The landlord pays for:
The gross commercial lease is used most often in multi-tenant and single tenant office buildings, industrial and some retail properties. The landlord collects fixed rents and pays the expenses out of them.
As costs increase over time, many gross and full-service leases will contain escalation clauses that increase rents over time to offset tax increases and higher insurance and maintenance costs. It is important that a tenant shopping for space understand any escalation clauses to project rent expense into the future.
The gross lease works well for office tenants and some retail properties. For many retail properties, especially those with seasonal income fluctuations, the percentage lease is better. This allows their rent to fluctuate with income.
Other Types of Commercial Leases
Let's take a quick overview look at other commercial lease types:
- Triple Net Lease: The triple net lease is used extensively in commercial real estate. It is popular for multi-tenant industrial and retail properties. With tenants whose expenses vary greatly, such as an industrial user of electricity, the triple net lease is best for the landlord.
- Modified Net Lease: The modified net lease is a compromise between the gross lease and the triple net. The landlord and tenant usually set up a split of maintenance expenses, while the tenant agrees to pay taxes and insurance. Utilities would likely also be negotiated in the modified net lease.
- Percentage Lease: A Percentage Lease is a lease that typically requires a tenant pay "Base Rent" and then on top of that amount pay a percentage based on monthly sales volumes. Percentage leases are commonly executed in retail mall outlets but depending on the location and nature of your business can have a dramatic impact on percentage rent.
Types of Commercial Properties
Let's take a quick look at the types of commercial properties in which to invest:
- Multi-family: Multi-family commercial real estate property types include duplex homes and other construction for habitation by multiple family groups. Apartment projects, of course, are included in this category type.
- Retail: Strip centers, shopping malls, big box stores, and free-standing retail business structures all fall into this category. This is a big chunk of the commercial real estate market.
- Offices: Single standing offices to office complexes make up this group. They are often grouped physically by the similarity of business, such as professional consultants, attorneys, and accountants.
- Industrial: Manufacturing, refineries and other similar businesses make up this category. It's a specialty niche, as there are many special considerations concerning zoning, licensing and the environment.
- Other Specialty: This covers a lot of ground, from oil change centers to skating rinks. There is a lot of variety in commercial real estate uses and business types.
Why to Consider Being a Commercial Real Estate Agent
Most new agents begin as residential agents. There are many more homes and condominiums bought and sold each year than any other type of property. Residential agents also handle land and building lots.
However, some agents who have been in the business a while begin to consider moving to commercial properties. They see very large deals, which means very large commissions. Sure, if you can get 3% of a million dollar deal, you're in the big time. However, when an average active real estate agent may do ten deals a year, the average commercial agent may do just one.
It not only takes much longer to take a deal from a prospect to a listing or purchase, but it also takes a lot more knowledge and skill to deal with the buyers and sellers of commercial property. It takes staying power, both financially and business wise to get to your first commercial closing table. When you do, it's a great feeling to deposit that commission check though. The best way to enter commercial real estate is with the finances to stick to it and a lot of desire and dedication.