September 13, 2016

What is the difference between a Gross Lease and a Net Lease?

Gross Lease vs Full Service Lease

With a gross lease, the landlord pays all or most expenses associated with the property, including taxes, insurance, and maintenance out of the rents received from tenants. Utilities and janitorial services are included within one easy, tenant-friendly rent payment.

A benefit of this type of lease is that it provides stability to the tenant, who can forecast expenses without worrying about an unexpected maintenance charges. The landlord assumes all responsibility for the building, while tenants concentrate on growing their businesses.

Net Lease

In a net lease, the landlord charges a lower base rent for the office space, plus some or all of “usual costs,” which are expenses associated with operations and maintenance. These can include real estate taxes; property insurance; and common area maintenance items (CAMS), which include janitorial services, property management fees, sewer, water, trash collection, landscaping, parking lots, and any commonly shared area or service.

There are several types of net leases:

Single Net Lease (N Lease)

In this lease, the tenant pays base rent plus a pro-rata share of the building’s property tax (meaning a portion of the total bill based on the proportion of total building space leased by the tenant); the landlord covers all other building expenses. The tenant also pays utilities and janitorial services.

Double Net Lease (NN Lease)

The tenant is responsible for base rent plus a pro-rata share of property taxes and property insurance. The landlord covers expenses for structural repairs and common area maintenance. The tenant once again is responsible for their own janitorial and utility expenses.

Triple Net Lease (NNN Lease)

This is the most popular type of net lease for commercial freestanding buildings. It is known as the net net net lease, or NNN lease, where the tenant pays all or part of the three “nets”–property taxes, insurance, and CAMS–on top of a base monthly rent. Common area utilities and operating expenses are usually lumped in as well; for example, the cost of snow removal would be part of the NNN fees. The tenant once again is responsible for their own janitorial and utility expenses.

Landlords typically estimate expenses and charge tenants a portion of these expenses based on their proportionate, or pro-rata share. A tenant who leases 1,000 square feet of a 10,000 square foot building would be expected to pay 10% of the building’s taxes, insurance, and CAMS, for example.

Triple net leases tend to be more landlord-friendly, and tenants should carefully review NNN fees and negotiate caps on the amounts they can be raised annually. An NNN lease can also fluctuate from month to month and year to year as operating expenses increase or decrease, making the company’s expense forecasting tricky and sometimes frustrating.