Understanding Net Versus Gross Leases

There is much confusion in the market between Net and Gross leases. Let me clear this up for you. Essentially, the subject deals with the operating expenses, capital expenses and real estate taxes associated with the property in which you lease space. The rent is either a net amount or a gross amount to the landlord. In a single tenant building, it is common for the landlord to charge a net, net, net rent which means that the tenant pays the landlord solely for the use of the building and then pays for the real estate taxes operating expenses and even the cost of capital expenditures, directly. For a multi-tenanted building it is common for the landlord to manage the building and to pay for all the operating expenses and real estate taxes out of the rent collected, which then must include the cost of real estate taxes, operating expenses and capital expenditures, wherein the term "gross" applies.

There are also variations on "net" leases. The absolute net lease can be called a "net, net, net" lease. This means that the real estate taxes, the operating expenses and the capital expenses are paid separately by the tenant. A "net, net" lease is where the tenant pays for the real estate taxes and operating expenses, but the landlord pays for the capital expenses. A "net" lease is where the tenant pays for the real estate taxes and the landlord pays for the operating and capital expenses. To be safe, I recommend having a discussion with the prospective landlord to clarify exactly what is or is not included in the rent whenever the term "net" is used. As I said in the beginning, there is a lot of confusion on these terms.

Often, the "gross" rent is actually a"modified gross rent" which mean that some element or elements of the expenses have been carved-out so the tenant pays them separately, even if it is still paid to the landlord. Comon examples of this are: "tenant electricity" and cleaning services. Tenant electricity is somewhat of a term-of-art since it is meant to apply to the electricity charges that are consumed within the tenants space by lighting and plug-in electric devices. More often then not, there is no separate electric meter to account for this consumption separately and so landlords estimate the average cost per square foot and apply this to the size of the leased premises. This is termed a "rent inclusion" and frequently becomes a market driven number. In otherwords, most landlords will agree to the same amount because it has been commonly accepted. If you find a landlord that is asking for an amount out of the commonly accepted range, you will most likely be able to negotiate.

Operating expenses and taxes can vary greatly from one building to the next even within the same neighborhood. I will discuss the differences in a future communication. For now, I hope I have cleared-up any confusion on the difference between net and gross.

Comments

[Kevin Patrick]

I was wondering about this issue. Thanks for clearing it up. I had asked a few people but never got a clear answer. Thanks again