As a commercial real estate owner or someone looking to invest in a commercial property, you want to develop a steady income stream that will make your investments profitable and worthwhile. A large part of your success will be dependent on the individuals or businesses you attract as renters for your property, and how you handle those relationships as part of your investment over the long-term.
And to do that, you need to understand the difference between a gross lease and a net lease, so you can be sure to structure strong tenant deals (or invest in the right property with low risk and long term earning potential.)
This post will cover the difference between a net lease and gross lease, and outline all the advantages you should be looking for in your next commercial real estate investment.
What Is a Net Lease?
A net lease is an agreement between a property owner and a renter, in which the renter is not only responsible for an agreed upon amount in rent each month, but also responsible for paying other expenses related to the property. In a triple net lease, or NNN lease, the renter (in addition to rent) is also required to pay for property expenses including:
- Real Estate Taxes
- Maintenance Fees
- Utilities and Fees
Who are Net Leases For?
Net leases are typically drawn up for individuals or businesses renting a stand-alone, single occupancy commercial building, such as a restaurant, retail location, or bank. These business owners usually have an established business plan(and a strong credit profile) that includes long-term occupancy of the location to further their growth, which works to the advantage of both the property owner or investor and the renter.
Advantages of a Net Lease
A net lease can be very advantageous for a commercial real estate owner or investor because passing on the operating expenses and taxes to the renter can remove market fluctuation risks and create a steady, reliable source of income for the property owner. Net leases also offer property owners and commercial real estate investors advantages such as:
- Long-term leases with a steady, reliable income stream
- Tenants invested in success
- Investment stability
- Asset flexibility
- Less management and oversight of property expenses
Net lease advantages also extend to renters by helping them create a strong clientele or customer base due to having a long-term, established location to do business.
What Is a Gross Lease?
A gross lease, on the other hand, is an agreement between a property owner and a renter in which the renter simply pays an agreed upon amount for use of the property each month. Gross leases do not require renters to cover any expenses, taxes, or insurance associated to the building, as these will all fall under the responsibility of the property owner or investor.
While a gross lease can be attractive to renters, it can also present more layers of risk and uncertainty for commercial real estate owners and investors, including:
- Short-term leases
- Profits lost to building vacancies between tenants
- Uninvested tenants
- Unpredictable income streams
- Unexpected tax increases or fees related to the property
Net Lease vs Gross Lease: Which Is Best?
While a gross lease can be more attractive to a renter (since they pay a fixed amount each month and never have to account for other expenses associated to the property) a net lease can also help a renter establish a recognized location for their business and provide them with long-term stability in that location as well.
From an investor or property owner standpoint though, a net lease can help you create that steady, predictable income stream that flows through your commercial investment properties. Invested renters who want to establish your building as their known business location are usually long-term, reliable renters who know how to manage a business and build the building expenses into their budget as a net lease renter.
Sands Investment Group is the fastest growing net lease investment company in America, with over 1,500 transactions in 48 states (to the tune of $3.5 Billion) since 2010. Our company is comprised of distinguished experts in the space who fully understand the advantages of net lease properties and can help you choose your next best commercial investment. Our client-focused approach, extensive connections, and marketing expertise are just a few of the ways we’re leading the net lease industry.