Leases are not all the same. Different types of commercial leases exist to accommodate different types of businesses and properties. Leases vary based on the rent calculation method used to determine how the space will be paid for as well as the taxes, insurance and maintenance expenses. At the highest level, there are two different types of commercial leases based on the rent calculation method—a gross lease and a net lease. Read on to determine the difference between gross and net leases.
A gross lease has a predetermined set rent regardless of how high or low other costs are for that month. In a gross lease, the landlord pays any and all of the additional expenses associated with owning, maintaining and using the property. These additional costs typically include expenses such as tax, insurance, utilities and maintenance repairs.
A gross lease is beneficial for both the tenant and the landlord. For tenants specifically, a gross lease makes budgeting each month much easier because the price and expenses of renting and using the space don’t fluctuate depending on the cost of use and repairs. Tenants pay a predetermined fixed rate every month, while the landlords assume complete responsibility for the building. Landlords may find a gross lease particularly beneficial if they plan on maintaining energy-efficient operations within the property. Since the tenant pays a fixed price every month, the tenant can subsidize or contribute to the cost of utilities.
A net lease is the opposite of a gross lease in terms of payment for utilities, taxes, repairs and any other additional expenses. In a net lease, the predetermined rent is typically lower and the additional costs aren’t included in that set rate. The tenant assumes responsibility for a portion or all of the utilities, repairs or other property expenses associated with the property. These additional costs can include property taxes, insurance, operations, maintenance, services, utilities and repairs. Different levels of net leases exist to clarify which of these expenses the tenant is responsible for paying.
Because tenants are responsible for a portion or all of the utilities in a net lease, they may be more motivated to conserve their utility use and end up paying less than they would in an all-encompassing gross lease. Additionally, with a net lease, tenants have more responsibility and, thus, more control under a net lease. On the other hand, landlords may prefer a net lease because of the reduced level of responsibility and cost they incur for upkeep and maintenance of the property, depending on the agreed terms.
Understanding how rental expenses are charged within different leases is a crucial component of responsibly renting commercial real estate spaces. Interested in commercial real estate investment? Ground + Space is a leading commercial real estate brokerage firm that specializes in single-tenant and retail NNN investments. Contact us today to find out more about our current listings!