Net Leases vs. Gross Leases: Which One Is Right for My Business?
A one-size-fits-all or a cookie-cutter approach does not work when it comes to commercial leases. The difference between a net lease and a gross lease can make all the difference to your establishment and business.
In this article, we will outline the differences between a gross lease and a net lease so that you can make the right choice for your business. You should be prepared to get legal representation from an experienced real estate attorney in Alabama in order to protect your business interests.
A Gross lease is considered tenant-friendly in the real estate circuit. This is because the rent is all-inclusive. This means that you don’t need to pay anything additional for occupying the property, such as janitorial services or utilities.
In some cases, a gross lease may also include property taxes and insurance. Taking this into account, it’s fundamental that you carefully negotiate such types of leases.
From a tenant’s point of view, a gross lease is beneficial if your business consumes excessive power or has certain particular requirements. At the same time, it is important to understand that the concept of a gross lease is to keep things easy for the tenant without overburdening the landlord. A knowledgeable attorney can prove to be invaluable during these types of negotiations.
Advantages and Disadvantages of a Gross Lease for a Business
Gross lease may be helpful to your business in the following ways:
- There are no additional costs associated with renting the property since the cost of rent is fixed and is all-inclusive.
- You don’t need to take care of any administrative duties associated with the space, which can be time-saving.
Primary cons associated with a gross lease include:
- Rent could be higher even though there are no additional costs that you need to take care of.
- An unresponsive or lax landlord may not maintain the property properly causing trouble for a customer-facing business.
There are several types of net leases. However, a triple-net lease is the most common in Alabama. At face value, these are considered to be more pro-landlord. You won’t just pay rent for occupying the space, but will also be responsible for paying a share in the insurance, taxes, and maintenance of common areas. This includes janitorial services, parking lots, and lobbies.
This is how a typical net lease transaction plays out – the tenant pays a base amount to the landlord in the form of rent plus an additional amount in the form of property insurance, taxes, and CAM (common area maintenance). You would be required to pay a proportionate share of the NNN costs.
Additional rent paid against actual expenses is usually reconciled between the tenant and landlord at the end of each lease year. It is important for tenants to be wary of any amount increase in additional rent. You should also negotiate caps to make sure that you don’t find yourself locked in a lease with unacceptable levels of inflated costs.
Triple net lease places a major part of the responsibility on the tenant. However, there are upsides to these since you can have a transparent view of your operating expenses in relation to the amount charged. You can make better decisions for leasing commercial property. In addition, with the right negotiation, you may actually be able to pay less than what you would have in a gross lease.
Advantages and Disadvantages of a Net Lease for a Business
A net lease may be helpful in the following ways:
- Potentially lower cost of rent to the tenant.
- Transparency in relation to the cost of property’s utilities.
- Triple net leases are generally offered in more attractive locations.
- You can use your business’ creditworthiness to negotiate a lower rate.
Cons of a triple net lease for businesses:
- You are basically paying to maintain an asset that you don’t own.
- Tenants are stuck with increased responsibilities related to maintenance and bill payments.
- The responsibilities of maintaining the property fall on the tenant.
- Unforeseen costs are always possible in the form of insurance premium spikes or damages.
Choosing the Right Commercial Lease
There are several different factors to consider when choosing one type of commercial lease over another. While gross leases may appear costly upfront, net leases may drain the bank account in the long run. On the flip side, a triple net lease may give you the enhanced peace of mind and transparency you require to run a business since you know exactly what you are spending on.
It takes an informed real estate attorney to understand the individual nuances that apply to a particular situation. For this reason, it is crucial that you don’t enter a lease without first consulting with a seasoned lawyer.
Get Legal Help from a Qualified Real Estate Attorney in Alabama
The seasoned attorneys at the BHM Law Group are strong negotiators and realize the importance of investing in the right lease for a business. Whether you are an established business or a fledgling start-up, our attorneys can help you with all matters related to corporate and real estate law.
Schedule your free and confidential consultation with us today. Call (205) 964-9764 or write to us online.