Different leases can be used for various purposes. There are many types of commercial leases that can accommodate different kinds of properties and businesses. The rent calculation method is used to calculate how much space will be paid for, and taxes, insurance, and maintenance costs will determine the lease's cost. Based on rent calculation, there are two types of commercial leases at the top level: a gross lease or a net lease. Continue reading to learn the differences between net and gross leases.
A gross lease requires that the tenant pay a flat fee to the property owner for the exclusive use and enjoyment of the property. The fee covers all costs associated with property ownership, including taxes and insurance. Gross leases are flexible enough to meet the needs and can often be used in commercial property rental.
A lease is an agreement between a property owner or lessor and a lessee/tenant. A lease, which is commonly written, gives the tenant the exclusive use of the property for a specified period. In addition, the tenant agrees with the owner to pay a fixed amount regularly. This could be weekly, monthly, or annually.
On the other hand, a gross lease allows the exclusive tenant use of the property by paying a flat rate. It is most commonly used to rent commercial property like office buildings or retail spaces with multiple lessees. The landlords calculate rents or fees to cover the operating costs of these areas.
These expenses include:
This calculation can be done using historical property data, analysis, or both. Then, the tenant and landlord can negotiate the rent amount and terms. For example, the landlord may request that tenants include landscaping and janitorial services.
Gross leases give tenants the ability to budget their expenses accurately. These leases can be especially useful for small businesses or those with limited resources who wish to reduce variable costs and maximize profits. Companies can focus on expanding their business instead of worrying about net leases.
Important: A gross lease that does not include utilities or insurance. The tenant must handle these costs.
There are two types of gross leases. The modified gross lease is the first, and the full-service lease is the second.
Modified gross leases include the main provisions of a gross lease. However, they can be tailored to the specific needs and requirements of the tenant and property owner. It's a mix of a gross and net lease. At the lease's inception, the tenant pays base rent.
This gross lease covers a portion of other property costs, including property taxes, utilities, and insurance. For example, this modification may say that the tenant will pay the electricity bill but that the property owner is responsible for garbage pickup.
Modified gross leasing is commonly used in commercial spaces with more than one tenant. The landlord pays for operating costs, while the tenant pays property expenses.
A full-service lease can be one of your simplest gross lease options. This type of lease requires that the tenant only pay rent and the landlord takes care of all costs. In this way, the landlord adds any other expenses such as maintenance and property taxes to rent.
Gross lease allows the tenant to rent without budgeting for additional costs like property maintenance. Full-service leases, however, can be more costly because the landlord usually covers extra costs.
Tip: Always read the fine print before signing any lease.
A gross lease has its benefits and drawbacks for both the landlord and the tenant. Below are some common pros and cons.
Gross leases can be an excellent option for property owners who want to rent out their homes.
However, landlords face some disadvantages.
The following are some of the benefits that a gross lease can provide tenants:
Some of the main disadvantages are:
A net lease is a different type of lease than a gross one. A net lease is a contract where the tenant takes on some or all of the costs associated with the property, such as utilities and maintenance. There are three types.
Although net leases give tenants more significant control over certain costs and property aspects, they come with increased responsibility. For example, tenants may be allowed to make minor repairs if they are responsible for maintenance. But they are also responsible for most repairs.
Sometimes, even though tenants pay maintenance costs, landlords restrict or prohibit any cosmetic changes to the property. Variable utility charges are also applicable to tenants. Different strategies may be used to reduce consumption to manage the costs.
A lease is an agreement between a landlord and tenant, where the landlord grants the tenant full rights to the property. Rent, on the contrary, is the fee charged by a property owner for exclusive use by a tenant of their property.
Gross and net commercial leases are the two main types. These two types can be further divided into modified gross, full service, gross, single, double net leases, and triple net leases.
The gross lease is the most basic and common type. It is a contract between a landlord or tenant where the lessee, in return for the exclusive use of the property, agrees that the lessor will pay him a fixed amount for some time. This includes rent and all costs associated with ownership, such as taxes, insurance, and utilities.
If you are looking for more information on lease types, we are here to help at A Street Partners.