Determining Whether Net Lease or Gross Lease Is Best for You

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There are several commercial real estate conditions and terms, but the net or gross lease could contain the most significant for the tenant based on what type of lease he or she is seeking. Gross leases versus net leases are the types of rental calculation methods that affect how much and at what point the tenant is to pay his or her lease payments.

There are different forms of a gross lease, but the primary stipulation is that the tenant pays the landlord a lump sum for the rent of the property. Then, the landlord pays expenses either in entirety or most of them based on the terms in the lease. This includes insurance, taxes, maintenance and repairs of utilities and other aspects of the real estate location. Janitorial services are often included as well once the gross lease payment has been received. However, not all tenants are able to pay through these processes, and there are modifications to these or the tenant may utilize the net lease method.

The net lease is smaller through each payment in comparison, but the tenant pays the expenses. The less monies paid each quarter or month provide a greater ability to navigate financial difficulty when the commercial property does not offer a large amount of revenue through customers and sales. However, the expenses are entirely paid by the tenant in most situations, and this could become costly depending on the size and variety of utilities, maintenance, repairs and replacement for parts. Another choice could be the modified gross lease that is a combination of the two. This may provide the most benefits based on the arrangements with the landlord.

Benefits of a Gross Lease

The gross lease is also called a full-service lease because after the payment has been provided to the landlord, all services are taken care by him or her. These situations are most beneficial for those commercial tenants that have enough revenue to pay out an entire lump sum to the landlord for the rental amount. One payment then provides all the utilities, labor, service and other items as specified by the lease contract. The conditions and terms are setup through negotiation with the landlord and this creates a relationship where both benefit with few drawbacks depending on the factors involved.

It is important for the tenant to ensure all the specifics are ironed out such as which janitorial services are provided to the property, what utility consumption becomes in excess of the standard charges and how much of each type of power is permitted each month. While certain types of insurance may be covered such as liability, the tenant may be required to pay property insurance and taxes on all real estate and transactions. The primary benefits are offered through the ease of interactions, knowing what is given by the landlord and what may be forecasted based on these projections. Then, the business owner may concentrate on his or her company instead of these matters.

Benefits of Net Lease

The most immediate benefit of a net lease is through the lower payments of rent by the tenant. When he or she does not want, cannot afford or is better suited to a net lease, it is best to ensure that these lower and more standard rental payments are provided for in the lease. However, the usual utilities and other maintenance, repairs and janitorial fees will apply as necessary based on consumption and usage. Common areas, sewer, water, sprinklers, parking lots and even trash collection are usually paid separately and each month. In a net lease, the tenant is responsible for payment and arranging any services that were not already setup by the landlord.

Types of Lease and Legal Support

There are several net and gross lease types. The one that is best for the tenant may vary depending on his or her circumstances. Some may split certain taxes or bills, and others may lead to profit sharing with the landlord. If the lease payment and other services are too much for the tenant, another net lease could be the best option to negotiate.

Leases are contractual agreements that have various clauses and conditions. It is best to contact a lawyer before signing one of these, and it is recommended that a legal representative assist in drafting a lease to provide for the most benefits in negotiation and terms and conditions. The lawyer will work for the best possible outcome for his or her client.


Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.

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