Commercial Property Leases – Gross & Net Rents

Commercial Property Leases – Gross & Net Rents

There are two types of leases when it comes to commercial property. These are:
a.  gross rental leases and
b.  net rental leases.

Net rent

Net rent is essentially the base rent wherein the tenant has the sole responsibility to pay the maintenance and operating expenses, real estate taxes and insurance costs for  the commercial property whether it being commercial office, industrial or retail. At the beginning of the period when a tenant takes possession of a property, he makes an additional payment to the base rental, which is a predetermined proportion of all maintenance and operating expenses, the state taxes and insurance costs for the property. Although these may be excluded in certain circumstances, these are mostly compulsory charges that tenants have to pay.

To put in a nutshell, the rent is broken up in to two parts.

(1) The base rental, which usually increases annually at a fixed rate (CPI or market value) and
(2) a proportion of the outgoings which increases at the same rate as the actual outgoings for the individual property.

Gross rent

Conceptually, gross rent is the opposite of net rent. A gross lease amount includes all maintenance and operating expenses, council rates and taxes and insurance costs for the entire term of the lease. The tenant has no obligation to pay rent other than basic gross rental. This is usually calculated by the landlord and has the outgoings included in the total amount based upon the anticipated expenses. Sometimes tenant may have to pay a percentage of the increase in outgoings from the first (base) year of the lease. On other occasions, depending on economic factors, the landlord may choose to absorb some of the outgoings.