A gross lease is a commercial lease with one rent that covers the space and the building's operating costs. The landlord pays the property taxes, the insurance and the maintenance out of that rent.
The Business Development Bank of Canada (BDC) calls those costs incidental expenses: "Your costs on top of base rent" (BDC, leasing terms). A gross lease moves them inside the rent.
The label leaves one question open: which costs. The US Office of the Comptroller of the Currency (OCC) supervises national banks. Its lending handbook describes office buildings leased on a gross basis, "with the tenant typically responsible for expenses directly related to occupancy such as utilities and janitorial" (OCC handbook). Under that kind of gross lease, the tenant still pays for its own electricity and cleaning.
The handbook draws the conclusion for bank examiners: "lease agreements should always be reviewed to determine which expenses are the landlord's responsibility". Read the expense clauses and treat the label as a summary. Our leasing guide sets the gross lease beside the other types of commercial leases.
Gross rent is the single all-in figure a gross lease quotes, per square foot per year. Take an engineering firm that leases 6,000 rentable square feet at $32.00. Its gross rent is $192,000 a year, or $16,000 a month. Rentable square feet count the suite plus a share of the building's lobbies and corridors.
A full service lease, also written full service gross or FSG, is a gross lease whose rent also covers the suite's utilities and janitorial service. The tenant pays one figure and the landlord runs the building.
The US General Services Administration (GSA) leases space for government agencies, and it publishes the lease form it signs. The form itemizes a fully serviced rent: shell rent for the space, operating costs and the cost of fitting out the suite. The operating costs cover "cleaning services, supplies, materials, maintenance, trash removal, landscaping, water, sewer charges, heating, electricity" (GSA lease template).
A modified gross lease is a commercial lease that splits the building's operating costs between the landlord and the tenant. The rent covers some costs, and the tenant pays the others directly or as a share.
Listings shorten it to MG. BDC defines it as a lease "under which you and the landlord share certain incidental expenses". The definition sets no standard split. One modified gross lease puts taxes and insurance in the rent and bills utilities. Another bills a share of every cost above a set level.
The table shows a usual split for each structure, which a lease can change.
| Cost | Full service gross | Gross, office style | Modified gross | Triple net |
|---|---|---|---|---|
| Property taxes | In the rent | In the rent | In the rent or shared | Tenant |
| Building insurance | In the rent | In the rent | In the rent or shared | Tenant |
| Common area maintenance | In the rent | In the rent | Shared | Tenant |
| Utilities for the suite | In the rent | Tenant | Tenant | Tenant |
| Janitorial for the suite | In the rent | Tenant | Tenant | Tenant |
| Roof and structure | Landlord | Landlord | Landlord | Landlord, in most leases |
An industrial gross lease is a modified gross lease used for warehouses and light industrial buildings. The rent usually includes the property taxes and the building insurance at their first-year level. The tenant pays its own utilities and upkeep, and often its share of later increases. The label has no official definition, so read what the lease says about each cost.
A base year is the year whose operating costs a gross rent already covers, usually the first year of the lease. In later years the tenant pays its share of the building's costs above that level, so the rent rises when the costs do.
A tenant's share is its rentable area divided by the building's. The engineering firm occupies 6,000 of 48,000 square feet, a 12.5% share. Say the building's costs rise by $40,000 over the base year. The firm owes $5,000 more that year.
The GSA template treats property taxes this way. Its tax base is "the unadjusted Real Estate Taxes for the first full Tax Year following the commencement of the Lease term" (GSA, tax adjustment clause). After that year, the government pays "its share of any increases" and receives "its share of any decreases".
For operating costs, the template uses an index. It adjusts them each year by "multiplying the base rate by the annual percent of change in the Cost-of-Living Index". That index is the CPI-W, a consumer price index from the US Bureau of Labor Statistics. The clause compares the reading for the month before the lease began with the same month of each later year.
Apply that formula to the engineering firm. Its lease began in September 2021, and $8.00 of the $32.00 rent is the operating cost base. The CPI-W stood at 268.387 in August 2021 and 328.481 in August 2026 (FRED).
| Lease year from | CPI-W, August | Change since 2021 | Operating costs | Full service rent |
|---|---|---|---|---|
| September 2021 | 268.387 | Base | $8.00 | $32.00 |
| September 2022 | 291.629 | 8.7% | $8.69 | $32.69 |
| September 2023 | 301.551 | 12.4% | $8.99 | $32.99 |
| September 2024 | 308.640 | 15.0% | $9.20 | $33.20 |
| September 2025 | 317.306 | 18.2% | $9.46 | $33.46 |
| September 2026 | 328.481 | 22.4% | $9.79 | $33.79 |
In its sixth year the firm pays $202,740, which is $10,740 more than in its first. A rent most tenants would call fixed rose 5.6%, with no change to the rent for the space itself.
A base year set in a low-cost year raises every later bill. The GSA template guards against one case. When a property is not yet "Fully Assessed", the tax base moves to the first tax year with a full assessment. A half-empty building creates the same problem for cleaning and utilities, and a gross-up clause corrects it. Settle the base year in the letter of intent, before the lease is drafted.
An expense stop does the job of a base year with a fixed dollar figure. The lease states the level, such as $12.00 per square foot, and the landlord pays costs up to it. The tenant pays its share of anything above. A base year floats with what the building spent that year. An expense stop is known on the day the lease is signed.
A gross lease puts the building's operating costs inside the rent, and the landlord carries the risk that they rise. A net lease bills those costs to the tenant on top of a lower base rent, so the tenant carries that risk.
- Tenant on a gross lease. One figure to budget, and less say over how the building is run.
- Tenant on a net lease. A lower base rent, plus bills that move with taxes, insurance and repairs.
- Owner on a gross lease. Control of the building, and income that shrinks when costs outrun the rent.
- Owner on a net lease. Steadier income, with the costs passed through.
A net lease bills some or all of the building's costs to the tenant separately. BDC describes the simplest form as a lease "under which you typically pay for one incidental expense directly". A triple net lease, or NNN, bills all three groups: property taxes, insurance and maintenance.
Net rent is the base rent a net lease quotes, before the building's costs. Canadian listings show it beside additional rent, the tenant's share of those costs. To compare two quotes, bring both to one all-in figure. A $20.00 net rent with $12.00 of costs equals a $32.00 gross rent in the first year. After that, the two leases split cost increases differently.
For the owner, the measure is net operating income (NOI): the building's yearly income less its operating expenses, before any loan payment. Fill the engineering firm's building with gross leases at $32.00. Rent is $1,536,000 and costs are $576,000, or $12.00 per square foot, so NOI is $960,000. A triple net building at a $20.00 net rent produces the same NOI, with the tenants paying the costs.
The two buildings part when costs rise. A buyer values each one by dividing its NOI by a cap rate, here 7%. The chart shows the gross building's value as its costs climb, with and without a base year in its leases.
Source: Sphera Credit calculation on the page's example building: value = net operating income / cap rate, at a 7% cap rate. The 22.4% rise is the change in the U.S. Bureau of Labor Statistics CPI-W, U.S. city average, all items, from August 2021 to August 2026, via FRED (series CWUR0000SA0).
With a fixed gross rent, a 22.4% rise in costs removes $129,024 of NOI and $1.84 million of value. That rise is the change in the CPI-W over the firm's five lease years. With a base year in every lease and a full building, the tenants pay the increase and the value holds.
Lenders test for that risk. The guidelines US bank regulators share ask a lending policy to cover the "sensitivity of income projections to changes in economic variables such as interest rates, vacancy rates, or operating expenses" (OCC, lending policies).
A lender also checks the debt service coverage ratio (DSCR): NOI divided by the yearly loan payments. With payments of $700,000, the gross building's ratio falls from 1.37 to 1.19 after that rise in costs.
A lender therefore reads each gross lease for its base year, its expense stop and its rent steps. The OCC's definition of NOI makes room for what the tenants pay back: "Tenant reimbursements may also be included if the reimbursed expenses are included in the operating expenses".