Gross Lease

Gross Lease: What the Market Actually Requires

Gross leases dominate multi-tenant office, where they are marketed as full service, and they show up in small industrial, medical, and older mixed-use buildings. The defining feature for underwriting is that expense inflation lands on the owner: if utilities, insurance, and taxes climb while rents are flat, NOI falls dollar for dollar. Lenders therefore underwrite gross leased buildings to a full expense load, typically using the higher of actual expenses or market comps from the appraisal, and they grow expenses faster than rents in multi-year cash flows.

Treatment varies by capital source. Banks and life insurance companies underwrite office gross leases with stressed expense growth and will test debt service coverage in later years, not just year one. CMBS deducts full expenses plus replacement reserves and TI/LC below the line, so the same rent roll produces visibly less lendable cash flow than an equivalent net leased property. It is also worth noting that apartment leases are functionally gross leases, which is why multifamily underwriting lives and dies on the expense ratio, commonly 35% to 50% of effective gross income depending on market, property age, and who pays utilities.

For borrowers, the negotiation happens at the lease and at the loan. At rollover, pushing tenants toward expense stops, utility pass-throughs, or modified gross structures converts uncontrollable expense risk into recoverable income, and lenders reward the improved structure with better proceeds. When buying a gross leased building, audit the seller's expense history line by line before you set your basis. Underwriters will substitute market expense levels for understated actuals, and the NOI you paid for is not necessarily the NOI they will lend against, a gap that surfaces late in the process when it is most expensive to fix.

Why It Matters for Your Loan

On a gross leased building, expense risk is your risk, and lenders price it that way: same face rent, lower NOI, lower proceeds than a net leased comparable. Expense underwriting is also where deals retrade, because lenders substitute market expense levels for optimistic actuals late in the process. Commercial Lending Solutions underwrites the expense structure lease by lease before a deal goes to market, so the NOI lenders quote against is the NOI that survives diligence and closes.