Net Lease vs. Gross Lease: Is It All That Straightforward?

Net Lease vs. Gross Lease: Is It All That Straightforward?

Those who have never rented a commercial property may not realize this, but there’s no one-size-fits-all solution when it comes to commercial leases. Some business owners pay one monthly rental fee, which includes all utilities. Others pay for everything from rent to insurance, taxes, services, and maintenance.

The two most popular types of commercial leases are known as net leases and gross leases. This article will offer an in-depth comparison to help renters and landlords figure out which option will best suit their unique situations.

What Is a Gross Lease?

Gross leases, sometimes referred to as full-service leases, are commercial agreements in which the tenant pays one all-inclusive monthly price. The landlord ensures that this price covers all the expenses of occupying the property, including utilities. Landlords who want to ensure that their tenants are helping them cover things like state and federal taxes and property insurance must stipulate that in the lease.

This type of commercial lease is generally considered the most tenant-friendly option. Landlords need to be careful with gross leases and should consider hiring a real estate lawyer to draft the document. Careful consideration of potential exceptions like excessive power consumption can help to reduce otherwise undue burdens on landlords. Modified gross leases allow for some extra tenant payments.

What Is a Net Lease?

A net lease is a rental agreement that stipulates the portion of taxes, maintenance costs, and insurance fees to be paid by a tenant in addition to the commercial business’s monthly rent. There are three types of net leases, which are defined by how many of the additional expenses are paid by the tenant. They are:

1.  Single net leases, in which the tenant pays only one of the three expenses noted above.

Double-net leases, or net-net (NN) leases, in which the tenant pays two of the noted expenses.

Triple net leases, sometimes referred to as net-net-net (NNN) leases, in which the tenant pays all three of the expenses associated with property ownership in addition to his or her monthly rent.

Triple net leases are the most commonly used form of net lease. They’re also the most landlord-friendly. This type of commercial lease is best suited for single, long-term tenants who plan to operate their businesses from the same rented building for a decade or longer.

The Middle Ground: Modified Gross Leases

The difference between modified gross leases and single net leases isn’t huge. It matters less what the two parties decide to call the lease than it does what stipulations the agreement contains. A modified gross lease that stipulates that a tenant is responsible for paying for utilities on top of the monthly rent, but not the taxes or the insurance, could also be classified as a single net lease.

The primary difference between a modified gross lease and a net lease is that modified gross leases are less prone to cost fluctuations. The landlord, not the tenant, takes on the bulk of the risk associated with rising prices. As a result, modified gross leases typically come with higher monthly rental payments than net leases.

Modified gross leases are more common in commercial buildings with multiple tenants, such as office suites. Common modifications to gross leases include requirements that the tenant pays for some or a portion of the costs associated with hiring janitorial services, maintaining common areas, or obtaining utilities. Typically, the landlord pays for building maintenance and taxes, while tenants who have signed modified gross leases pay for utilities and cleaning.

Choosing the Best Option

The ideal lease agreement benefits both landlords and tenants. While triple-net leases are considered by most to be landlord-friendly and gross leases are more tenant-friendly, there’s a lot of room to negotiate to make sure both parties’ needs are being met adequately. The types of commercial leases described all serve slightly different purposes, as well.

When to Choose a Gross or Modified Gross Lease

Landlords who rent out multiple units in the same commercial building often structure their agreements in the form of gross or modified gross leases. In this case, paying one set fee every month, plus whatever additional payments are required by modifications to the lease, makes life easier for tenants by making it easier for them to budget and simplifies things like utility payments for landlords.

To ensure that landlords can pay for taxes, insurance, and property maintenance, gross leases are associated with higher rent prices. Most tenants are happy to make this trade-off for avoiding the hassles associated with paying additional expenses. Remember: it’s also fine to modify the lease so that it stipulates that tenants who consume excess electricity, for example, can expect to see their rents rise. Some landlords also add clauses connecting rent increases to rising tax rates to help protect against inflation for long-term leases.

When to Choose a Net Lease

Landlords who rent to single tenants tend to prefer net leases, as do some tenants. Net leases give tenants more control. Plus, the base rent is lower, so they don’t generally cost much more than gross leases. Landlords, on the other hand, will appreciate being able to take a more hands-off approach to property maintenance.

The costs of maintenance, insurance, and taxes can all fluctuate. Landlords who want to attract quality tenants will need to lower the rental amount enough to make up for the additional financial risks passed on to their tenants. As a result, they can expect to see slightly less of a return on investment from rent. Landlords who prefer NNN leases often live out-of-state or have multiple real estate holdings with little time to spare to devote to the day-to-day management of the property.

The Importance of Making an Informed Decision

Commercial landlords and tenants both need to make informed decisions about what types of leases will be the best fit for their unique situations. There’s no one right solution for everyone. Hiring a lawyer to draw up a lease or read through an existing agreement is the best way to avoid any unpleasant surprises.

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