Real Estate Investing : Gross Lease

People lease commercial real estate properties using either a gross lease or modified gross lease or a net lease. Residential properties are usually leased under a gross lease with the exception of the utility expenses. A gross lease is also referred to as a pass-through lease or a full service lease. When a tenant leases a property using a gross lease, he pays a gross rent and the landlord has to pay the operating costs of the building risking rising operating expenses over the duration of the lease. A net lease refers to a lease where the lessee is responsible to pay for the taxes, insurance and maintenance of the property.

Types of Gross Lease: Full Service Gross Lease: In this kind of lease, the landlord is responsible for the payment of taxes, maintenance, insurance and utilities. All these expenses are included in the base rent paid by the tenant. The lessee is responsible for any property insurance, taxes and utility expenses beyond the permitted building standards. The lessee has to agree to pay his share of any increase in the operating expenses of the building.

Modified Gross Lease: In a modified gross lease, which is similar to a full service gross lease, except that certain basic services such as taxes, maintenance, insurance, janitorial services, electrical services etc. are excluded from the lease. This type of lease is commonly used in multi-tenant buildings where there are different tenants with different needs.

Commercial Gross Lease: The lessee pays the landlord a fixed monthly rent and the landlord is responsible to pay for the operating expenses of the building and its maintenance. The lessee pays for the utilities, maintenance, operating expenses, taxes as well as janitorial services. Industrial Gross Lease: The landlord leases an entire industrial building to a tenant. The tenant has to use the building as per the agreement in the lease, manufacturing and distributing and maintaining an office in it. The landlord will be responsible to pay for the maintenance, operating costs, taxes, insurance, utilities etc. that will be paid for by the lessee in the base rent.

The landlord has to take precaution against lessees with deceitful intent and make sure they verify any information provided by the lessee before signing the lease. The lessee, especially in a commercial building, has to make sure to find out if the lease includes only his office space or also parts of common area such as, hallways etc. The lessee has to make sure that he studies the terms of the lease carefully to ensure he is not paying for something that is not connected with his office space as if a new hallway built in another floor!

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Real Estate Investing: Triple Net Lease

A net lease refers to a lease agreement where the lessee is responsible for paying the property taxes, maintenance, insurance, for the utilities and for the janitorial services. Of the net leases, the most common type is a triple net lease.

Triple Net Lease or NNN Lease: A triple net is also known as a NNN lease. As per a triple net lease, the tenants are responsible for operating and maintaining the property as well as the common area maintenance, which will be divided among the tenants in proportion to the area they rent. The landlord is responsible only for the structural integrity of the building. The tenant pays the landlord a base monthly rent and is responsible for the maintenance and the operational costs of all utilities as well as that of the property. The tenant has a few legal defenses to relieve him of his responsibility while using a triple net lease.

Absolute Triple Net Lease: It is also referred to as a bond lease. It is similar to a NNN lease, but differs in that the tenant has no legal defenses if he fails to meet his responsibility of paying the maintenance and operational costs, property taxes and insurance, utility and janitorial expenses etc.

Investors dealing in commercial real estate look out for multi-tenant properties that have triple net leases, as all they have to do is deal with how to invest the rent paid by the tenants. They like properties with triple net leases as they are not bothered by management obligations and have an assured income. On finding such a property, they have to take extra care with the due-diligence and study every document relating to the building as well as study the lease agreement in detail seeking the counsel of an experienced attorney.

Triple net leases have to be carefully drafted to compensate for inflation as well as tax increases, which could influence the rent and thereby affect the lease. The landlord should be very careful in selecting tenants by checking their credit worthiness, the type of business they do and how it will have a positive or negative impact on the property has to be analyzed carefully. If an investor is buying a property with a triple net lease tenant or tenant, the lease agreement has to be carefully scrutinized and the lease term has to be checked, and then carefully reviewed to see if the existing tenants would agree to an increase in the base rent as well as check the credit worthiness of the tenants. It is an investors dream to land a multi-tenant commercial property with a true triple net lease but they are a rarity.

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