What is the Difference Between Net Lease & Gross Lease?

It is easy to get confused with all of the commercial real estate lingo out there.  Two such examples are Net Lease and Gross Lease.  Understanding the differences between the two can equate to a substantial savings when negotiating commercial real estate lease terms.

Gross Lease

A gross lease is an agreement whereby the Tenant pays a fixed rental rate and the Landlord pays all of the operating expenses.  This means that the Landlord pays expenses such as insurance, real estate taxes, utilities and common area maintenance (CAM).  The Tenant would then be responsible for the rent and any specific business-oriented expenses.  Due to the Landlord assuming inflation risks by allowing the Tenant to pay a fixed sum every month, many commercial real estate landlords have abandoned the gross lease – with the exception of some smaller office leases.

Net Lease

In a net lease, the Tenant pays rent, plus a portion of expenses associated with the building being rented.  The expenses may include insurance, real estate taxes, utilities and common area maintenance.  There are basically three categories of a net lease.  They are single, double and triple net.  These types of leases put the burden of increasing expenses on the Tenant and remove them from the Landlord.

Single Net Lease

A single net lease is an agreement in which the tenant pays the rent and certain expenses.  In this situation, the Tenant is usually expected to pay all or part of the property taxes in addition to the rent.  This type of lease is more common in older buildings with shared utilities.

Double Net Lease

With a double net lease, the Landlord is responsible for structural repairs to a building, while the Tenant is responsible for taxes, building insurance, utilities and maintenance costs.

Triple Net Lease

A triple net lease is an agreement in which the tenant pays for maintenance, operating expenses, taxes and insurance.  In this situation, the Tenant is responsible for repair and maintenance of any common areas.  This form of net lease is typically used with freestanding buildings and multi-unit structures where multiple Tenants share the maintenance costs of the common areas.

Conclusion

While Tenants may perceive the best deal is to go with a gross lease, this is not always the case.  The terms and price of the lease agreement can affect the overall  value of the lease arrangement.  For example:

If the average gross lease in your area is $18.00 per square foot, while a net lease is calculated at $12.00 per square foot and expenses calculated at an additional $4.00 per square foot, the next lease in this instance will save the Tenant about $2.00 per square foot over the gross lease.  This savings needs to be weighed carefully against variable expenses and any potential increases that may go along with them.

Are you looking for representation in negotiating either a gross or net lease?  If so, let Rodney McNabb w/MainStreet Realty Services assist in weighing the costs and potential risks for you.  You can contact him via email at Rodney(at)MainStreet-Realty.net or by calling (919) 322-3960 ext. 7

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About Rodney McNabb

Rodney McNabb is a Commercial Real Estate Broker with MainStreet Realty Services, Inc., He specializes in the sales, leasing and property management of Small Commercial Real Estate throughout the Greater Raleigh / Durham / Chapel Hill, NC Areas. You can reach him at (919) 322-3960 ext. 7 or via e-mail at Rodney@MainStreet-Realty.net