We get this question all the time: “What is the difference between a gross lease and a triple net lease?” This is an important question as it pertains to how your future landlord accounts for the operating expenses of his building and how responsible you will be for those costs. Here is the breakdown of the Gross and the Net Lease and how they pertain to your commercial lease agreement.
Under this method lease rates are giving as one figure, usually on a price per square foot per year (i.e.$20 Gross). This amount accounts for a base rent and has operating expenses (property taxes, insurance and maintenance) baked into the rate. Typically your landlord will agree to pay for your operating expenses for the first year, known as the base year in which the following years are compared to. An expense stop is often created, meaning that the landlord will cover the operating expenses to the base year and pass on any increase in operating expenses to the tenant for following years. For example let’s say that for the first year of your lease operating expenses were $5,000 dollars and the second year of your lease they were $6,000. Since the expense stop is $5,000 for the base year the tenant is responsible to pay an additional $1,000 in rent to cover the increase in operating expenses. This is a method used by landlords in order to protect them from incurring additional expenses from higher operating costs.
In a net lease, the tenant pays for the operating expenses instead of the landlord, giving the lease two components: a base rate and operating expenses. For example, where in the gross lease the rate is represented as $20 psf/yr Gross, the Net lease would be represented as a base rent of $12 psf/yr plus operating expenses of $8 psf/yr. Unlike the Gross Lease, in a Net Lease tenants are responsible for paying for the variances in operating expenses on a yearly basis meaning that if operating expenses go down over years tenants pay less and if they go up over years tenants pay more. As a lease negotiation tactic, many tenants will seek a “ceiling” or cap” for operating expenses meaning that the tenant is only liable to pay operating expenses up to a certain point, wherein the landlord incurs the remainder of the cost. For example, if a tenant has a cap on operating expenses at $5,500 per year and actual operating expenses are $6,000 for the year, the tenant pays the cap of $5,500 and the landlord pays for the remaining $500.
So there you have it, the Gross and Net Lease! Learn more about how to calculate monthly office rental costs in Austin.