Net Lease or Gross Lease by cometjunkie45

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                       Net Lease or Gross Lease
When leasing commercial space, Tenants are often faced with a number of terms
that Landlords use to describe the type of lease being offered. The terms range from
Triple Net Lease to Gross Lease to Modified Gross Lease. Knowing which type of
lease structure best suits your company’s needs can save you in the long run.

The simplest lease to understand is the “Net Lease,” also known as a “Triple Net”
Lease. Under this type of lease, the tenant is responsible for all expenses associated
with the operation and maintenance of the building (e.g., everything from paying the
light bill and annual ad valorem property taxes to replacing the HVAC or the roof).
These are most common with retail and industrial properties where the tenant
occupies the entire property and plans to occupy the property for a long period of
time – 20 to 40 years. The reason the tenants agree to pay all of the expenses is
because this lease shifts the risk of expenses to the tenant and, thus, allows the
landlord to lower the rent as much as the capital markets will accept. This structure
serves as “alternative” financing for a company that is typically expanding rapidly
and preserving cash to open new stores or using their cash to invest back in their
business at a higher rate of return than they would earn on the real estate.

A “Gross Lease” is a lease in which the Landlord pays all of the expenses over the
term of the lease. The Landlord charges a higher rate to account for the expenses
that will be incurred over the lease year. Additionally, the Landlord builds in high
enough annual increases in the rent to offset increased expenses over the lease
term. However, many times the Landlord will have some type of “pass through”
expense that is charged back to the tenant on an annual basis in addition to the base
rent. For example, a typical gross lease structure in a multi-story office tower is for
a base rent of $23.00 per square foot gross with an “expense stop” of $8.50 per
square foot for expenses. Then in year 2 of the lease, if the total expenses for the
building are $9.50 per square foot, then the tenant is responsible for paying an
additional $1.00 per square foot in rent, hence the increased expense is “passed
through” to the tenant.

Also possible is a “Modified Gross Lease,” where Tenants pay their own separately
metered utilities and/or janitorial expenses. There can also be a question of how the
landlord treats expenses in a gross lease if the building is not 100% occupied
(because obviously the utilities are going to go up substantially, if a new large tenant
moves into the building), but that is a discussion for another day. It is best to
consult your real estate professional if you have questions about lease space and
how to structure your lease to best lower occupancy costs over the term of your
lease.

								
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