Net and Gross Leases: What’s the Difference?
Commercial tenants can quickly get bogged down in the differences between net and gross leases.
There are distinct economic differences between the two lease types and their variations. Understanding those differences can mean a substantial savings when negotiating lease terms.
A gross lease is an agreement whereby the tenant pays a fixed rental rate and the building owner pays all the operating expenses. This means that the property owner pays expenses such as insurance, taxes and utilities associated with the property, while the tenant is responsible for the rent and specific business-oriented expenses. The gross lease has disappeared in large part due to the additional costs assumed by the property owner.
In a net lease the tenant pays a portion of expenses associated with the building being rented. There are three categories of net lease. They are single, double and triple net. These types of leases put the burden of increasing expenses for utilities, taxes and insurance on the tenant and remove liabilities 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 instance, 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 arrangement, the landlord is responsible for structural repairs to a building, while the tenant is responsible for taxes, building insurance, utilities and maintenance costs. Double net leases are rare in industrial situations, due to willingness of tenants to accept fractional tenancies to cut costs.
Triple Net Lease
Finally, a triple net lease is an arrangement in which the tenant pays for maintenance, operating expenses, taxes and insurance. In this instance, the tenant is responsible for repair and maintenance of any common areas. This form of net lease is often used with freestanding buildings but is also found in multiunit structures with tenants sharing the maintenance costs of the common areas.
Tenants may perceive that the best deal would be a gross lease, but 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 $45 per square foot, while a net lease is calculated at $27 per square foot, with expenses calculated at an extra $16 per square foot, the net lease in this instance saves you $2 per square foot over the gross lease. This savings needs to be weighed carefully against variable expenses and any increases that may go along with them.
Whether you are presented with a net or gross lease agreement, a detailed analysis needs to be completed to determine better value. It is a good idea to look at historical data to determine the variable expenses such as heating, cooling and electricity. When comparing potential sites, look at the cost of maintenance and weigh the potential risks detailed in competing leases.