During rental calculations in a real estate commercial lease transaction, the agreement in rent payment can either be net, gross, or modified lease. The first two leases are the most commonly used in commercial rent agreements. In general terms, a gross lease agreement is where the landlord caters for every expenditure and the tenant pays one full amount as rent while a net lease agreement is where the tenant caters for some extra utilities like electricity over and above their rental payments. As a commercial real estate investor, it is important to know the difference among the three before selecting the lease that best works for your property.
In a net lease agreement, the real estate landlord or property management in charge collects a lower base rent plus other amounts for Common Area Maintenance (CAM) services such as property management fees, real estate taxes, and other janitorial services available to their commercial unit. Under the net lease, there is a single, double, and triple net lease. Most commercial spaces operate with the triple net lease, also known as “NNN lease” where the tenant pays for rent and an equivalent share of property insurance, taxes, and CAM services. They may also be responsible for their own occupancy. This lease is preferred by landlords because it tends to lean on to their benefit.
In a gross lease, also known as a full service lease agreement, the tenant pays his own property insurance and taxes and a full rent, which they fully agreed upon, that covers for every other thing the landlord pays for. In this agreement, the common utilities may have a maximum usage amount that the landlord caters for, which in this case a tenant should be made aware of. This type of agreement is preferred by most tenants because once they pay their full rent, they are left to concentrate on other business matters. Other real estate commercial landlords also prefer this method because they cater for every payment all at once and don’t have to keep on following up with tenants for utility payments.
As a compromise for both of the above commercial leases, the modified gross or net lease offers a common ground for negotiations between the real estate commercial landlord and tenant. The rent is still paid in full, including CAM services, property taxes, and the utilities are covered by the tenant. The negotiation is on which nets should be included in the base rent and what the tenant should cover separately. It is important for a landlord to go through their preferred lease agreement and ensure all expenses are covered in a way that does not burden either them or the tenant.