Overview
- Net and gross are two common types of commercial real estate leases.
- A net lease involves the tenant paying base rent plus at least one additional expense (property taxes, maintenance and/or insurance).
- A gross lease typically involves the tenant only paying base rent, and the landlord is usually responsible for variable expenses.
- Factors to consider when choosing the best lease type include your business size and type, long-term plans, budget and cash flow, and the amount of responsibility and control you want.
The phrase “new lease on life” refers to a new opportunity to achieve success or popularity, according to Merriam-Webster. Similarly, a new lease for a commercial property comes with the potential for professional success and a profitable business – if you play your cards right.
In a previous blog entry, we discussed essential tips to keep in mind when negotiating a commercial lease. If you haven’t already reviewed that information, we recommend doing so now or making a note to review it later. In this blog entry, we’ll address a question that you must confidently be able to answer before proceeding with the leasing process: What is the difference between a net lease and a gross lease?
Net and gross are two common types of leases that you’ll encounter as you search for commercial real estate, and the category you choose can have a significant impact on the amount you pay and the financial future of your business, according to LegalZoom. Before you sign anything, here’s what you need to understand about a net lease versus a gross lease and how to select the best option for your unique situation.
What Is a Net Lease?
If you agree to a net lease, you’ll pay the base rent and at least one additional expense (insurance, maintenance or property taxes), according to LegalZoom. The net lease category includes these subtypes:
- Single net lease (N): Base rent plus one additional expense
- Double net lease (NN): Base rent plus two additional expenses
- Triple net lease (NNN): Base rent plus all three additional expenses
- Absolute net lease: Base rent plus all three additional expenses and the cost of significant repairs (e.g., window replacement), according to WeWork
What Is a Gross Lease?
A gross lease requires the tenant to pay a flat base rent to the landlord on a routine basis, according to Investopedia. The landlord will typically calculate the rent with operating costs (such as taxes, insurance, utilities, and other anticipated expenses) in mind. Generally, there are two categories of gross leases, as explained by Investopedia and WeWork:
- Full-service gross lease: Everything is factored into the rent (taxes, maintenance, insurance, utilities, etc.), so the tenant doesn’t have to worry about variable expenses. This can be more expensive, as the landlord will consider their need to cover all the additional costs when setting the rent amount.
- Modified gross lease: This type combines characteristics of net and gross leases by making the tenant responsible for some portion of the variable costs associated with the property. For example, you might pay the base rent plus the electric bill, while the landlord covers the rest.
Pros and Cons of Gross Leases for Tenants
Each lease type has unique advantages and disadvantages for you as a tenant. Here are some typical pros and cons of gross leases to consider before you sign anything, according to Investopedia, WeWork and LegalZoom.
| Gross lease pros | Gross lease cons |
| Predictable fixed cost | Higher rent to offset the landlord’s responsibility for variable costs |
| No additional admin duties related to property finances | Lack of control over maintenance |
Pros and Cons of Net Leases for Tenants
Like gross leases, net leases also come with pros and cons. Here are some standard benefits and drawbacks associated with this category of commercial lease, according to Investopedia, WeWork and LegalZoom.
| Net lease pros | Net lease cons |
| Lower base rent | Potentially high maintenance costs |
| More flexibility to modify/customize the space | Difficulty budgeting due to responsibility for variable and unexpected expenses |
Gross Lease vs. Net Lease: How to Compare and Choose
Selecting the right lease type for your business is crucial to establishing a solid foundation for long-term success. Here are some factors to consider when making your decision, according to LegalZoom and Investopedia.
- Budget: Gross leases are typically better for businesses with limited resources, while net leases make more sense for established companies with steady cash flow.
- Size and expected growth: Gross leases are less complex and allow fledgling companies to focus more on expansion.
- Desired level of responsibility: Larger companies with more resources might opt for net leases due to their ability to handle greater complexity and control over the commercial space.
- Long-term plans: For example, signing a triple net lease usually means committing to a property for at least 10 years.
It pays to partner with someone who has experience negotiating commercial leases to ensure the best outcome for your business. The Avalon Realty Associates team offers tenant representation services and provides expert insights tailored to your unique needs and objectives.
Connect with our commercial real estate experts today by calling 847-506-1000 or emailing info@avalonreal.com.