What’s the Difference Between A Gross Lease and a Triple Net Lease?

Triple Net Lease… Gross Lease… What does it all mean?

Triple Net Lease vs. Gross Lease

What is a “Gross Lease”?

A question I get asked fairly frequently from business owners is what does it mean for a lease to be “gross”? This is a common term in commercial real estate.

It doesn’t meant that your lease smells funny, has stuff oozing out of it, or anything like that…

A pretty good textbook definition is that a gross lease is one in which the landlord pays all expenses associated with the ownership of the property including maintenance, taxes, and insurance and utilities.

Basically, with a gross lease a tenant pays their monthly rent and the landlord pays all associated expenses with the property. This arrangement is usually found in office buildings and buildings with many small tenants. It’s a simple way of calculating a rental rate. There are no adjustments made annually to reflect an increase in taxes or insurance or even a decrease in snow removal expenses.

The Triple Net Lease

The “opposite” (for lack of a better word) of a gross lease is a triple net lease. What is that all about? Three nets???

Basically a textbook definition of a triple net lease is one in which the tenant pays a base rental to the landlord and pays, as additional rent,  a pro-rata share of the taxes, maintenance, and insurance expenses based on the tenant’s occupied percentage of the property.

In this example, a tenant would have a fixed rent and on top of that he would pay a share of all expenses of the property (the nets). If the taxes go up, the tenant kicks in a little more, if the taxes go down, the tenants obligation to pay goes down.

Calculating Triple Net Expenses

The amount of the expenses a tenant must pay is based on the amount of space they occupy in a building. If a tenant occupies 1,000 SF of a 5,000 SF building, he would be responsible for 20% of all of the taxes, insurance, and maintenance costs such as snow removal and landscaping.

This type of lease is commonly seen in newer retail properties with minimal if any common area and also industrial properties or in properties where there is only one company occupying the entire property.

With a triple net lease, the expenses are reviewed usually on an annual basis and a report is sent to Tenants with copies of the associated invoices or possibly a summary with an option for the Tenant to review the invoices upon request.

Which is the Better Option?

Is one better than the other??? There are arguments on both sides I guess. On one hand, with a triple net lease, the Landlord has no real incentive to reduce operating expenses since they are passed onto the tenant. On the other hand, in a competitive market, lower operating expenses could be the difference between two like properties and become part of the decision making process.

If you have a gross lease, you don’t have to worry about annual increases due to increased property taxes or insurance because your rent is fixed and the landlord pays the taxes and insurance. With a gross lease there is usually some sort of pre-determined annual increase built into the lease to cover possible expense increases but because that is all negotiated up front, you can budget for the annual increases. Now if the taxes go down (yeah right!) then the landlord benefits because he is still collecting the same amount of money and his expenses just went down. There is a real incentive for a Landlord to work on reduce operating expenses though not at the expense of maintaining a professional level of service for the tenants in the building.

Common Variations

There are several variations of both types of lease including modified gross leases, double net leases, graduated leases, single net leases…the list goes on but the “Gross Lease” and the “Triple Net Lease” are the two you are most likely to come across.

Further Reading

If you’re current lease is coming up for renewal there are things you need to consider before deciding whether to renew at your current location or relocate to another property. Here is another post worth reading which highlights five things to consider when renewing your lease.

Do you have any other specific real estate terms you’d like explained? Leave a comment below with any questions you have about the commercial lease process.

Just remember that with any commercial real estate lease or any lease for that matter, you should consult a real estate professional and also your attorney. These people are experts at what they do.

 

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  1. TheMillionairesBlog says:

    Great article, I have 35 rental properties and have done alot of flipping but never any commercial real estate

  2. Beland says:

    Thanks for checking out my blog. I hope to educate a few people about commercial real estate and maybe along the way do a little business with them… FYI, you are already way into commercial real estate with the 35 rental properties. A good basic definition of commercial real estate can be found on CityFeet

    Basically commercial real estate is any real estate that generates income for the owner.

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  1. […] rates at other properties compare to what you’re paying. You may not realize you’re comparing a triple net lease to a gross lease. Do you know the difference? I often compare a Tenant Rep to an attorney. You don’t go into […]

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