How can you compare net leases and gross leases?

1 What are net leases?

A net lease is a lease agreement where the tenant pays a base rent plus some or all of the property expenses, such as taxes, insurance, maintenance, utilities, and repairs. This type of lease can be structured in several ways; for example, with a single net lease (N lease) the tenant pays rent plus property taxes, whereas with a double net lease (NN lease) the tenant pays rent plus property taxes and property insurance. A triple net lease (NNN lease) requires the tenant to pay rent plus property taxes, property insurance, and maintenance. Lastly, an absolute net lease requires the tenant to pay rent plus all property expenses, including capital expenditures and structural repairs.

2 What are gross leases?

A gross lease is a type of lease agreement where the tenant pays a fixed rent which includes most of the property expenses. These expenses may include property taxes, insurance, maintenance, utilities, and repairs - all of which are managed and paid by the landlord. This type of lease is also known as a full-service or all-inclusive lease. Nevertheless, there are variations to this agreement which may require additional charges or reimbursements from the tenant for certain expenses. For instance, a modified gross lease requires the tenant to pay a fixed rent plus some of the utilities or janitorial services. Alternatively, a gross lease with expense stop requires the tenant to pay a fixed rent that covers the property expenses up to a certain limit or base year. If these expenses exceed this limit or increase from the base year, then the tenant must pay the difference.

3 Pros and cons of net leases

Net leases have both advantages and disadvantages for landlords and tenants. For landlords, net leases reduce risk and responsibility for property expenses, increase cash flow stability, and transfer some of the tax benefits to the tenants. However, net leases may have lower rents than gross leases, require more tenant creditworthiness and financial reporting, and limit the landlord's control over property maintenance and appearance. For tenants, net leases may have lower rents than gross leases, offer more flexibility and autonomy to manage the property, and allow deductions of some property expenses from income taxes. On the other hand, net leases increase tenant risk and liability for property expenses, create more uncertainty and variability in monthly payments, and require more capital and expertise to maintain the property.

4 Pros and cons of gross leases

Gross leases can be advantageous for landlords and tenants, but they also have their drawbacks. For landlords, gross leases may have higher rents than net leases, attract more tenants who prefer simplicity and convenience, and allow the landlords to deduct all of the property expenses from their income taxes. However, they can also increase the landlord's risk and responsibility for the property expenses, create more volatility and unpredictability in the cash flow, and require more capital and expertise to maintain the property. On the other hand, tenants may benefit from gross leases since they reduce the tenant's risk and liability for the property expenses, offer more certainty and consistency in the monthly payments, and require less capital and expertise to maintain the property. But they may also have higher rents than net leases, limit the tenant's flexibility and autonomy to manage the property, and transfer some of the tax benefits to the landlords.

5 How to compare net leases and gross leases

When comparing net leases and gross leases, you must consider your budget, risk tolerance, and investment horizon. How much can you afford to pay for rent and expenses? How much risk are you willing to take on the property expenses? How long do you plan to own or occupy the property? Depending on the answers to these questions, one type of lease may be more suitable than the other. However, there is no definitive answer or formula to compare net leases and gross leases as each lease agreement is unique and negotiable. Thus, it is important to consult with a professional commercial real estate broker, attorney, accountant, or advisor before signing any lease contract.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?