In this article, you'll learn:
- The key differences between gross, net, and modified gross leases.
- How net leases offer control over expenses but may lead to unexpected cost increases.
- Why modified gross leases provide flexibility but can be more complex to negotiate.
Getting a fair lease is every bit as important as finding an office space that is ideal for your company. As you begin to discuss terms with prospective landlords, you'll discover that there are a number of different types of leases that may be offered. Understanding the features of each type can help to ensure that you get the best possible deal for your company.
Gross Lease
What It Is: Sometimes called a full service lease, this type of lease requires you to pay rent plus operating expenses like utilities, maintenance and property taxes.
Benefits
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Your rent will typically be the same every month. This makes it easier to budget, and you won't have to worry about things like extreme temperatures causing your costs to sky rocket.
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Gross leases simplify accounting by reducing the number of payments that you need to make.
Drawbacks
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Most gross leases include language that allows the landlord to raise the rent in certain circumstances, such as if the property taxes are raised or insurance premiums rise.
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Fixed costs means there is no way to ever reduce your operating expenses aside from negotiating a new lease.
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These types of leases tend to favor tenants and are less common as a result.
Net Lease
What It Is: There are three sub-types of net leases:
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Single net lease: You pay rent plus a portion of property taxes to landlords. Utilities and services are paid directly to the providers. Landlords are only responsible for building expenses.
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Double net lease: You pay rent plus property taxes and insurance payments to landlords. Utilities and services are paid directly as with a single net lease. Landlords are responsible for common area maintenance and structural repairs.
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Triple net lease: You pay rent plus property tax, insurance and maintenance costs to the landlord. You are only responsible for paying utilities directly to providers.
Benefits:
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Since you pay utilities yourself, you have the ability to reduce costs through green improvements and other interventions.
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Savings are passed along to you. If property taxes decrease or no major maintenance is needed, your rent rates can be reduced.
Drawbacks
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Because you are responsible for paying for maintenance, your costs can increase suddenly. For example, if the HVAC system fails, your rent could increase without warning to cover the costs.
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These types of leases tend to be more favorable for landlords.
Modified Gross Lease
What It Is: Sometimes called a modified net lease, this type of agreement has you paying rent in a lump sum. The funds cover the actual rent plus other operating expenses that you agree upon with the landlord.
Benefits:
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Services and utilities are not usually included in the lease, giving you some control over costs.
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Changes in property taxes, maintenance and insurance are covered by the landlord, so your rent will not suddenly increase.
Drawbacks:
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Modified gross leases take longer to negotiate since you and the landlord will need to discuss what will be included in the lease.
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Typically, modified gross leases are based on estimated expenses, meaning you may end up paying more than what the actual operating costs end up being.
Here are some other articles to check out:
7 Commercial Leasing Due Diligence Tips
Top 10 Commercial Real Estate Terms You Need to Know
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