Commercial real estate leases. There are different types? Yes there are.

The two most common are the Net lease and the Gross lease.  The main difference between a Net lease and a Gross lease is how rent is delineated.  A different type of lease doesn’t mean the content of terms and conditions will be different, nor that the amount of rent will be different.

So, if the agreement details between the landlord and the tenant will be noted the same in either of these lease types and the amount of rent will likely be the same, why bother with different types of leases?  Good question.  There are many people claiming advantages and disadvantages between Net and Gross leases.  I have listened to many people and I have read a lot of content.  None of it made any sense.  It really didn’t.  It seemed, clearly to me, that the content was written by people who simply wanted to write something and none of it was valuable to me. So I’ll talk about my experiences working with commercial real estate leases.

I’ll say it like this.  Whether a Net lease or a Gross lease is better for the landlord or for the tenant depends on what the landlord and the tenant want.  Makes sense, right?  So no one online can credibly claim that one or the other is better for you without consulting with you to learn what you want.  So, I’m not going to be able to claim one is better over the other here either.  I can, though, point out some factors for you to consider.

Let’s describe the difference first.  With a Net lease, a base rent will be noted and an amount for Net rent will be noted.  The Net rent is a separately identified amount of rent payment that covers items such as the landlord’s property taxes, insurance, common area maintenance, and other items the landlord identifies.  The combination of these two components of rent comprises the full rent payment obligation of the tenant.  Typically, these are monthly payments.

With a Gross lease, there is one comprehensive rent amount noted in the lease. This single payment covers everything agreed upon by the landlord and tenant, and written into the lease of course.

The amount of rent a tenant pays the landlord is not likely to be different based on the type of lease.  Why?  Because the landlord’s expenses and desired revenue are the same – they are what they are.  So, landlords want to receive enough money to pay their costs associated with the property plus some income regardless whether it’s received as one comprehensive payment with a Gross lease or received as a combination of two payments with a Net lease.

So, what could be the difference or differences?  With a Net lease, the amount of the monthly rent obligation can be broken down to show an itemization of the items it covers.  For example, say there’s a base rent of $2000/month and Net rent of $500/month.  In that Net lease, the items the landlord covers with the Net rent can be itemized. This can make it easier for the landlord to renegotiate with tenants on the amount of Net rent to be paid when the landlord’s costs for these items change.  The amount of Net rent could also vary each month depending on changes to landlord costs.  For the tenant, a refund could be negotiated when the amount of Net rent paid exceeds these landlord costs.  Tenants could also negotiate to facilitate and pay for maintenance on their own and negotiate to decrease the Net rent amount accordingly.  Any details regarding how rent payments are allocated, means of renegotiating rent terms, changes to rent, etc., should always be codified in the lease.

Some people prefer the Gross lease because it may be less complicated in calculating rent.  There’s one dollar figure identified and that’s it.  The lease should still clearly identify tenant and landlord responsibilities for the property, namely those that are covered or not covered by rent payments.

The above is just an example.  Whether or Net lease or Gross lease is better really does depend on each individual’s preferences.  I highly recommend having a substantive conversation with your agent to better understand what may work better for you. Below is a video presentation that provides additional information about commercial real estate leases. There is also more information posted on our blog page at https://veteranrealty.us/good-info-to-know/.

In case you’re still deciding whether to lease or to purchase commercial real estate for your business, here is another blog post with video that provides more information to consider: https://veteranrealty.us/should-you-buy-or-lease-space-for-your-business/