What are you really paying for – net, gross, or modified gross leases?

Banking and Financial Institutions

By Banking and Financial Institutions

When choosing your leased space, you need to be certain you’re comparing apples to apples. Your decision to enter into a lease without understanding the significance of the type of lease may have a drastic financial impact on your company. The three most common types of commercial leases are: net, gross, and modified gross.

Net Leases: Net leases allocate building costs and responsibilities between the landlord and the tenant. The most common type of net lease is the triple net lease (“NNN”). With a triple net lease, the tenant pays taxes, insurance, and maintenance in addition to the monthly rent. If the building is newer, in good repair and you, the tenant, are going to be the only tenant in the building, this may not be a bad option. In exchange for the higher level of building responsibility, the tenant’s monthly lease payment is usually lower. Also available are single net leases (“N” – tenant pays monthly lump sum plus property taxes) and double net leases (“NN” – tenant pays monthly lump sum plus property taxes and insurance). With a N or NN lease, the landlord is generally responsible for all other operating expenses.

Gross Lease: A gross lease is the opposite of a triple net. With a gross lease (sometimes referred to as a “pass-through” lease), the landlord will pay for all repairs, taxes, and insurance in exchange for tenant paying a fixed lump rental amount each month to the landlord. True gross leases are relatively rare outside of the residential or multi-unit retail context; but, when available, relieve the tenant of some of the risks usually associated with property ownership. The flip side of a gross lease is that your monthly rent will be higher than a comparable NNN lease – the landlord will, when it determines the monthly rent, factor in future repairs, taxes, and insurance.

Modified Gross Lease: On the scale of allocating responsibility for the property, a modified gross lease falls somewhere in between a NNN lease and a gross lease. In real life, many leases are within this category. The landlord may agree to pay for real property taxes and major repairs (roof, foundation), but the tenant is responsible for insurance and minor repairs (windows, paint). The key is to negotiate and understand each party’s respective level of responsibility prior to signing the lease, and then decide whether the “great deal” on this property aligns with the small business owners’ risk tolerance.

When looking at your lease for the first time, it is important to remember that often these terms are negotiable. In any event, before you sign on that dotted line, be certain you know who’s paying for what.

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