Real Estate Investing: Adjusted Gross Lease

It is imperative that the lease structure of a property selected be just as suitable as the property. Commercial leases can be gross, adjusted gross or net leases. In a gross lease, the lessor is responsible for the payment of utilities, taxes, maintenance and the property insurance; the lessee has to pay the lessor a base rent, which includes all the charges. The lessee has to agree to pay his share of any increases that may occur in the base operating expense. In some cases, the lessee just pays a fixed base rent for the duration of the lease and agrees to pay for any increase in the operating expenses as well as the maintenance dues at the end of the first year of the lease.

What Is An Adjusted Gross Lease?

A modified or adjusted gross lease is similar to a gross lease except that it excludes some basic services that are typically provided by landlords such as the responsibility to pay their taxes, insurance, maintenance and utility bills. In some adjusted gross leases, the landlord is not responsible to pay for maintenance; janitorial services, electricity, and these charges are not included in the base rent. An adjusted gross lease is very useful for multi-tenant properties as each of the lessee has different needs and keeps different timings, hence they would prefer to have separate meters to measure the utility usage such as electricity and water. Separate meters will prevent any dispute regarding the pro-rata share each has to pay. Like for example in a multi-tenant building, let us consider two of the tenants. A is operating a boutique and opens from 9 am to 9 pm, Monday to Saturday, where as B is a dentist who works from 8 am to 8 pm, Monday to Friday. Separate meters will ensure that one tenant does not end up paying a part of the expenses of another tenant. The tenants are responsible to pay for their share of the utility bills.

Base rent in an adjusted gross lease is usually higher than a net lease due to the pass through feature of the lease. Pass through refers to the method of making the lessee pay a proportionate share, to pay for any increase in the operating expenses at the end of a base year. The recoverable expenses will be borne initially by the landlord, which can be calculated based on dollar per square foot, or a pre-defined amount. An adjusted gross lease is more equitable than a gross lease.

Lease agreements need to be understood clearly and the help of an attorney sought to comprehend its entire content. Make sure that the property selected and the type of lease suits your needs.

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