Operating a small business often involves renting office space, a warehouse, or other property types. There are two common kinds of commercial leases: a triple net lease and a gross lease. These two types of leases have distinct approaches to allocating costs between tenants and landlords.
Whether you’re looking for a retail space or a warehouse for lease, it’s important for small business owners to understand the differences before committing and signing lease agreements.
Under a gross lease, a tenant would pay a single flat fee for whichever property they lease from a landlord. In this kind of lease, the landlord agrees to pay for any and all expenses associated with the property and its use. This includes property taxes, building insurance, utilities, and, in some circumstances, repairs.
With gross leases, the landlord is responsible for quoting the rent with all costs included. The lease would incorporate all common area maintenance, property taxes, building insurance, utilities and circumstance-dependent repairs. On the other hand, the tenant would pay one lump sum of rent each month.
The appeal of this leasing structure benefits both the tenant and landlord due to the simplicity of the terms. It is very clearly stipulated in the lease what each party is responsible for and how the payment structure is made.
There are two kinds of gross leases: modified and full-service.
Modified Gross Lease:
A modified gross lease contains the principal provisions associated with a gross lease, but it can be modified to accommodate the tenant and landlord. Modified gross leases are essentially a combination of net and gross leases.
What distinguishes a modified gross lease is that the tenant agrees to a proportional share of some other costs associated with the property. This could include utilities, property taxes, insurance, or maintenance.
For example, these modifications could mean the tenant is responsible for the electricity costs, but the property owner is responsible for waste disposal and other associated costs.
Full-Service Gross Lease:
A full-service lease is one of the easiest all-encompassing gross lease options. All that is required is for the tenant to cover their rent. Meanwhile, the landlord assumes responsibility for all other costs. As such, the property owner calculates the costs of additional expenses into the rental amount.
This kind of gross lease allows the tenant to concentrate on their business operations and budget without worrying about additional expenses. Full-service gross leases often tend to be more expensive since the landlord oversees all extra costs.
A triple net lease is a frequently used lease structure in commercial real estate. The “net” that is referred to in this lease stands for the three pass-through expenses that the tenant pays in addition to their rent. Often referred to as “additional rent,” these pass-through expenses include common area maintenance (CAM), property taxes, and building insurance.
Because these costs are paid directly by the tenant, it gives the tenant a greater degree of control and oversight over the standard of service they receive and how the money is used within the commercial space. These costs can be paid monthly, quarterly, or annually.
There are benefits and differences between triple net leases and the types of gross leases. There is a reason why many business owners prefer commercial leases, but understanding the different kinds of commercial leases is imperative.
A triple net lease allows landlords to have a more hands-off approach when it comes to property upkeep. This can be an enticing proposition for owners with large portfolios. For tenants, taking on the burden of managing the property themselves can seem daunting. It has its upsides: it grants complete control over business expenses, and they can audit the CAM providers or book their own contractors to minimize costs.
With a gross lease, the landlord remains responsible for all costs and expenses associated with upkeep and maintaining the property. The tenant would have to pay a higher base rent to subsidize these expenses. Depending on the kind of gross lease, a modified gross lease would allow for some pass-through of agreed-upon expenses to go to the tenant.
Overall, triple net leases tend to show more favour to the landlords as they shift risks and expenses to the tenants. Full-service gross leases and modified gross leases benefit both parties and can be negotiated to strike an amicable balance.
When it comes to renting commercial property, regardless of whether it’s a warehouse for lease, a retail office space, or something in between, understanding the process of renting a commercial space is crucial. Working with a commercial real estate broker can help ensure you understand each lease structure and its differences to know which responsibilities are best for your business.
Blog posts from CMS Real Estate are for general information only. The content should not be considered real estate management or investment advice. If you are in need of professional real estate advice, please contact our team.
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