Monday, December 09, 2019

Making Sense Of Commercial Leases

Whether you are a real estate investor trying to find a user for your space or a business owner trying to find a new space for your company, you will more than likely find yourself needing to sign a lease. In commercial real estate there are two types of leases: net leases and gross leases, and each can be altered into different variations. For those not familiar with the commercial leasing process and what the different kinds of leases can mean for both owner and user this stuff can make your head spin.

But have no fear, what is that on the horizon? Why, it’s NAI Norwood Group charging in to save the day and explain the difference between gross and net leases!

Please, hold your applause and awards. We’re not heroes, we’re just passionate about educating people about the world of commercial real estate. So, let’s begin.

Gross Lease Vs. Net Lease

The two main categories of leases take varied approaches as to whether and/or how much the tenant or landlord is responsible for paying property operating expenses such as utility bills, taxes, insurance, etc.

In a gross lease, also known as a full service lease, the tenant pays a set sum or amount for rent based on what was negotiated when the lease was signed. It doesn’t matter if the expenses end up being higher or lower than expected, the tenant pays the same rate. You can find these leases in all property types. Sometimes when the cost of utilities is hard to sub meter or if the landlord just wants to keep it simple.  

In a net lease structure the tenant is responsible for rent as well as the expenses, often categorized into nets: property taxes, insurance, utilities and maintenance. Which and how many of these nets they are responsible for depends on the type of net lease they have. Tenants tend to pay less for base rent in a net lease because they are shouldering some of the property operations. So overall they pay the same amount, the difference is that tenant is at risk for the increase in these expenses.  Net leases are most common in industrial and retail facilities.

Simple enough of an explanation, right? But let’s get a little more granular, because both types of lease have variations and subcategories.

A Look At Lease Variations

Some common variations to the above would be an “Increase Over Base Year” gross lease. In these cases there is one lump sum for rent that was agreed to upon lease signing. So the tenant is not responsible for the expenses. However the landlord does have an ability to collect the increase over the base year on certain expenses. In other words the landlord can pass along the increases to the tenant.

Another variation, though slightly less common, is a pure net lease. In these scenarios maintenance of the building and grounds is passed along to the tenant. For example, in most leases if the roof fails or the parking lot splits, the landlord needs to take care of it. However in some leases the tenant assumes all of these costs.

A majority of the leases we deal with tend to fall into the full gross, modified gross or triple net category.

As an investor or tenant, the kind of lease signed can drastically alter the income and risk an investor sees, and the amount of rent and responsibility a tenant has. Have more questions about gross leases versus net leases? Reach out to us! Our expert agents and brokers would be happy to answer any questions you have, whether you’re looking for a space to lease or trying to find a tenant to lease your space.

No comments:

Post a Comment