Commercial properties can be leased in different ways, and this can have an effect on the financial risk you take on. Read on to find out what you, as an investor, need to know.
When you make a real estate investment, do you pay attention to the lease structure? If not, you should. There are two main types of real estate leases, gross and net, and their very different characteristics can have big implications for you as an investor.
With that in mind, here’s a rundown of the key differences between gross leases and net leases, and what real estate investors need to know about each.
A gross lease is what most Americans are familiar with.
When most Americans think of real estate leases, they’re thinking about a gross lease. This is the type of lease that is used for residential real estate leases like those of apartments, and it is also used for certain types of commercial properties — especially consumer-facing types like self-storage and hotels.
In simple terms, a gross lease simply requires a tenant to pay an agreed-upon amount of rent at regular intervals in exchange for the use of a property. For example, if an apartment rents for $1,000 per month, or a hotel room charges $119 per night, that’s all the renter has to pay to the landlord (although with properties like hotels and self-storage units, there’s likely to be a sales tax involved).
To take it a bit further, a gross lease leaves most of the expenses of owning and operating the building as the landlord’s responsibility. Specifically, gross leases always require the property owner to pay property taxes, building insurance, and routine maintenance and repair expenses.
I mentioned that gross leases are the most common lease type among consumer-facing types of real estate, but they are often used for other property types, for which buildings are shared among multiple tenants.
A gross lease is often referred to as a full-service lease in commercial applications. For example, office buildings often use full-service leases, because it would be impractical to charge tenants a proportional share of expenses like building maintenance.
A net lease shifts more expenses to the tenant.
On the other hand, a net lease means that the tenant is responsible for rent and certain other expenses of owning, operating, and/or maintaining the property.
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