Gross leases are becoming the order of the day

05-07-2005

Rode & Associates property valuers recommend that commercial and industrial property investors conclude gross leases because it simplifies budgeting exercises and administration, and improves tenant relations.

In terms of a gross lease, tenants pay a fixed rental, with no "hidden" (recovered operating) costs, except that they pay their own, separately metered, electricity, refuse, water and sewerage. The only caveat in the case of a gross lease is that it should make provision for regular market reversions, especially during a period of high inflation.

"Net-type leases are a throwback to the time when we had high inflation and landlords were trying to protect themselves in this way against run-away operating costs. But market reversions can do the same job," says Rode & Associates CEO Erwin Rode.

Landlords do not score in terms of net leases — they are just a potential bone of contention. Tenants are certainly not fooled by lower net leases into thinking they've got a better deal. In the end, what counts from tenants’ point of view, is their total occupation costs.