Searching for a new business location can be fun. That is until you face the confusing plethora of lease types. Commercial real estate leases will differ depending on the property and the landlord. Gross and net leases are standard property leases that you may encounter as you narrow your search for a location.
What’s the difference between a gross and net lease? Learn more about these types of commercial leases, so you can decide which is right for you and your business.
What Is A Gross Lease?
Gross leases, or full-service leases, are all-inclusive. A gross lease works similarly to an all-inclusive resort vacation, minus the sun on your face and the sand between your toes. As a tenant, you pay one sum to your landlord, and they take care of the rest. You may not have to pay for other services separately, as your landlord will pay all or most of your operating expenses. The rent of a gross lease may be higher than that of other leases because expenses are paid using the rent collected from the tenants.
Paying your expenses through one sum to your landlord makes it easier to manage your budget and make payments on time. Gross leases are usually used for residences or apartment complexes. However, some commercial landlords offer this type of lease.
Gross leases may include the following operating expenses:
- Maintenance expenses
- Property taxes
- Building insurance
- Utilities
- Janitorial services
With a gross lease, the landlord takes on more risk by paying for all or most of the operating expenses. Often the landlord will keep operating costs tight to prevent an increase in insurance or tax costs. If you use certain utilities heavily, the landlord may charge you an extra fee to offset your usage. This fee could be added to your lease or charged back to you.
What Is A Net Lease?
With a net lease, the base rent is lower than that of a gross lease. On top of this rent, the tenant must pay separate costs related to operating expenses. Your landlord will only pay for some, if any, of the operating expenses. As the tenant, you are responsible for paying the base rent and a fee that may cover taxes, insurance costs, or CAM (Common Area Maintenance) charges. Tenants take on more risk with net leases because they pay for more or all of the operating expenses instead of the landlord.
There are several types of net leases, including:
- Single net lease. A single net lease requires the tenant to pay for utilities, as well as a share of the building’s property tax. The amount of building space a tenant leases determines this share. The landlord pays for other building expenses like insurance and maintenance.
- Double net lease. A double net lease, or a NN lease, requires the tenant to pay a share of the property tax and insurance based on the amount of space they lease. The tenant must pay for their utilities, while the landlord pays for maintenance.
- Triple net lease. The tenant pays for almost all building costs with a triple net lease or NNN lease. This lease asks tenants to pay for utilities, property tax, insurance, and CAMs along with rent. The only thing the landlord pays for are repairs to the building.
- Absolute net lease. With an absolute net lease, the tenant pays for all expenses, including those for structural maintenance and damage.
Of these leases, the triple net lease is the most common type for commercial buildings and retail spaces. A triple net lease requires the tenant to take on more risk and responsibility. Yet, triple net leases can benefit tenants by putting any cost savings back into their pockets.
What About The Modified Gross Lease?
The modified gross lease, or modified net lease, is a combination of the gross and net leases. A modified gross lease can be beneficial to both the tenant and the landlord. Tenants pay rent to their landlord in one sum, like a gross lease. However, tenants may be responsible for paying more operating expenses as with net leases.
With the modified gross lease, tenants may pay the following as part of their rent:
- Rent
- Property taxes
- Insurance
- CAMs
Tenants may pay the following separately:
- Utilities
- Janitorial services
A modified gross lease has a fixed rent. If operating expenses fluctuate, the rent remains the same. For tenants, this means that rent will not increase because of an increase in operating expenses. It will not decrease either, even if operating expenses go down. This type of lease leaves room for the tenant and landlord to come to an agreement that benefits both parties.
Now that you know more about different types of commercial leases, you’ll be able to decide which leases may be better for your business.
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