Differences Between Gross Lease and Net Lease
Written by: Alan Nochumson
One of the most attractive aspects of commercial real estate is the ability to negotiate and structure deals in any way that fits certain criteria. In the sale of a commercial property, typically an entire interest in the property is sold for a single price. However, there is no “one-size-fits-all” approach to commercial leases. At the highest level, there are two main types of commercial lease: Gross lease and Net lease. The type of lease affects who pays for several expenses associated with the property, and as a result, affects how certain interests are aligned in the landlord-tenant relationship. Below we look at the differences between a Gross lease and a Net lease.
What is a Gross Lease?
A gross lease is often considered the most tenant-friendly lease type because the rent is all-inclusive. Under a gross lease, the tenant pays a single flat fee for the use of the space. The landlord agrees to pay for any and all expenses that come with the property and its use, including taxes, insurance, utilities, and often repairs. Landlords factor in the costs that they are taking on under a gross lease into the cost of the rent. There are advantages and disadvantages to this approach for each party. Gross leases tend to be easier for the tenant to manage, allowing for predictable expenses and less responsibility for the building. Gross leases can also involve some variation for the landlord, as prices fluctuate any savings or extra costs go to the landlord.
What is a Net Lease?
A net lease, most commonly known as a Triple Net or NNN lease, is one of the more common lease structures that you’ll find in commercial real estate. A net lease requires the tenant to assume most of the operating costs of the property separately from the base rent. These expenses are often known as the three nets — insurance, maintenance, and property taxes. They can vary from month to month, meaning it is a less predictable approach for the tenant. A net lease reverses the advantages and disadvantages of a gross lease. Tenants are motivated to reduce their utility consumption, but landlords have no immediate incentive to make energy efficiency retrofits beyond the long-term value of their property, and no easy way to recoup their expenses. Like the gross lease, however, the tenant and the landlord can agree to craft a net lease where a tenant will pay more or fewer of the associated operating costs.
Differences between Gross & Net Leases
Gross leases and Net leases can actually cost the same amount to a tenant, but there are reasons a landlord may choose to use one structure over another. With Gross leases, landlords have a more easily understood offering, since tenants can often get confused by the whole “base rent, additional rent” side of net leases. All the landlords have to quote is a single rate, which makes it fairly straightforward for tenants to understand. Net leases can protect both the landlord and tenant in different ways. Landlords are protected if the costs associated with operating the property (the NNNs) increase because those expenses are passed directly on to the tenants that benefit from utilizing the site. Tenants also have the ability to audit the common area maintenance expenses to ensure that the common areas are not only maintained properly but are not breaking their budget. Within Gross and Net leases, there are more granular differences depending on each case. Retaining an experienced and thorough attorney is advisable to find the best strategy to take when developing your lease.
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