A gross lease requires the lessee to pay a flat rate to the lessor on an agreed payment schedule in return for the exclusive use of the lessor’s property. A net lease, on the other hand, requires the lessee to pay the lessor’s lease rate and cover expenses associated with operating and upkeeping the property.

Not all leases are made equal, and commercial leases are no exception. The difference between these two types of leases dictates how much money you’ll have to pay to who to maintain your lease. While choosing one over the other may not seem like a big deal, some significant differences and advantages come with each type.

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What you need to know about gross leases

Gross leases are a type of lease agreement that allows the lessee, or tenant, to use the lessor’s property for a fixed rate. This fee might be paid every month, bi-weekly, or even annually. Gross leases are used by landlords to adequately cover fees associated with their property, such as:

Property taxes

Utility bills

Insurance

There are a few different types of gross leases. Here are the most popular variations.

Modified gross lease

A modified gross lease is a happy medium between a net and gross lease. The tenant still pays a fixed rate every payment period but is also responsible for some of the costs associated with operating the property, such as paying the monthly electricity bill. The lessor is usually still responsible for most of the property expenses.

Full-service lease

A full-service lease is a true gross lease—it’s an all-inclusive lease that bundles the rental fee and property expenses into one fixed rate. Tenants only have to pay this fixed-rate each payment period while the lessor takes care of all property expenses.

Pros and cons of a gross lease

There are a few benefits and drawbacks of gross leases for lessors and tenants. Here are a few of the most common pros and cons:

Pros

Lessor pros: If you’re the lessor, you can charge a higher amount per pay period for covering the property costs, therefore making more revenue. If the cost of living rises, you can ensure these costs are reflected in your flat fee.

Tenant pros: Having a fixed rate for each payment period means that you can accurately budget each payment period. You’ll also save time because you won’t have to pay multiple property-related costs each month.

Cons

Lessor cons: You’ll have to cover most, if not all, of the property-related costs each month. These costs can be unpredictable, so you may not be able to accurately predict your revenue for each payment period.

Tenant cons: Gross leases tend to be more expensive to cover these property-related expenses. This extra cost makes sense if your utilities and building maintenance are always looked after, but if you have a disorganized lessor who doesn’t keep up with building maintenance, you’ll end up paying for services that you don’t benefit from.

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What is property and casualty insurance?

How net leases are different from gross leases

Unlike gross leases, net leases have a lower base rental fee, but the tenant is responsible for more or all of the property-related costs, like maintenance, taxes, utilities, etc. There are a few different kinds of net leases based on what expenses the lessee is responsible for covering.

Types of net leases

Single net leases: The tenant is responsible for paying rent and property taxes.

Double net leases: The tenant is responsible for property taxes and insurance on top of rent.

Triple net leases: The tenant is responsible for rent, property taxes, insurance, and maintenance. Triple net leases are the most common kind of net lease.

Pros and cons of a net lease

Just like gross leases, there are a few benefits and drawbacks you’ll want to consider before making a net lease agreement, whether you’re a lessor or a tenant. Here are the most common net lease pros and cons:

Pros

Lessor pros: By leaving your property expenses in the hands of your tenants, you’ll be able to accurately predict your revenue each payment period because you won’t have to cover varying costs. Plus, you’ll save time on administrative duties because you won’t have to pay multiple bills each month.

Tenant pros: Your fixed rent rate will be less than a gross lease rate, which could potentially save you money down the line. You’ll also be in control of the way your building is maintained, so you may be able to make cosmetic changes that better suit your needs.

Cons

Lessor cons:While you have less responsibility for your property than under a gross lease, you have to depend on your tenant to take up this responsibility. A disorganized tenant could cause damage to your property by neglecting maintenance costs or even missing important payment deadlines.

Tenant cons: The costs associated with operating the property aren’t always predictable, so it might be harder to budget for covering these costs. You’ll have to be more conservative when using utilities, and you’ll also spend more time paying multiple bills each month.

Key Takeaway Both gross and net leases have significant benefits and drawbacks. If you’re a tenant, opt for a gross lease if you want a predictable rent bill or a net lease if you want more control over maintenance. If you’re a lessor, opt for a gross lease to adequately cover property-related costs or a net lease for less responsibility.

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FAQs

Why would I choose a net lease over a gross lease?

Choosing a net lease over a gross lease is a great choice if you’d like more control over how the property you’re leasing is managed. You may save more money if you’re conservative when using water, heat, and electricity, and you’ll have more control over how the property is maintained.

What’s more popular—a gross lease, or a net lease?

Gross leases are by far the more popular choice because of their simplicity and the control this type of lease gives to lessors. Tenants only have to pay a single flat fee each pay period, but lessors can control how much this fee is depending on rising costs of living, which may result in more revenue for the lessor.

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