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Gross Lease vs. Net Lease: Understanding the Difference for Your Business

April 16, 2025
Kyle Ball

Each has its own set of benefits and drawbacks, and the right choice for your business will depend on your specific needs and financial situation

When it comes to leasing commercial property, understanding the different types of leases is crucial. Two of the most common types are gross leases and net leases. Each has its own set of benefits and drawbacks, and the right choice for your business will depend on your specific needs and financial situation. In this post, we’ll break down the differences between gross leases and net leases, helping you make an informed decision for your business.

What is a Gross Lease?

A gross lease, also known as a full-service lease, is a type of commercial lease where the landlord covers most of the property’s operating expenses. These expenses typically include property taxes, insurance, and common area maintenance (CAM). The tenant pays a fixed rental amount, making budgeting more predictable.

Key Features of a Gross Lease:

Fixed Rent: Tenants pay a consistent rental amount throughout the lease term.
Landlord Pays Operating Expenses: Property taxes, insurance, and CAM are typically the landlord’s responsibility.
Simpler Budgeting: Predictable monthly payments make financial planning easier
Less Risk for Tenant: Fluctuations in operating costs are absorbed by the landlord.

Advantages of a Gross Lease:

Predictable Costs: The fixed rent makes budgeting straightforward. You know exactly how much you’ll be paying each month, which helps in financial planning.
Simplified Management: Since the landlord handles most operating expenses, you have fewer administrative tasks and responsibilities.
Protection from Cost Increases: If property taxes or insurance rates go up, your rent remains the same. This shields you from unexpected expenses.
Ideal for Small Businesses: For businesses with limited resources or those new to commercial leasing, a gross lease simplifies financial management.

Disadvantages of a Gross Lease:

Potentially Higher Rent: Landlords often factor in potential increases in operating expenses when setting the rent, which can lead to a higher initial rental rate.
Less Control Over Expenses: You have little to no control over how the landlord manages operating expenses. If they overspend, it may still be reflected in higher future rent adjustments.
Lack of Transparency: You might not have full visibility into the actual costs of property taxes, insurance, and CAM.

What is a Net Lease?

A net lease is a type of commercial lease where the tenant pays a base rent plus a portion of the property’s operating expenses. There are different types of net leases, each with varying levels of responsibility for the tenant.

Types of Net Leases:

Base Rent Plus Expenses: Tenants pay a base rent in addition to a portion of operating expenses.
Variable Costs: Monthly payments can fluctuate depending on changes in property taxes, insurance, and CAM.
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Lower Base Rent: Base rent is typically lower than in a gross lease.
More Responsibility for Tenant: Tenants take on more financial responsibility for the property.

Advantages of a Net Lease:

Lower Base Rent: The initial base rent is usually lower than that of a gross lease, which can be attractive for businesses looking to minimize upfront costs.
Potential for Savings: If operating expenses are lower than anticipated, you can save money.
More Control Over Expenses: In some cases, you may have more input into how the property is managed and how expenses are controlled.
Transparency: You have a clearer understanding of the actual costs associated with the property.

Disadvantages of a Net Lease:

Unpredictable Costs: Fluctuations in property taxes, insurance, and CAM can make budgeting challenging. You might face unexpected expenses.
More Financial Responsibility: You are directly responsible for a portion of the operating expenses, which can increase your financial burden.
Increased Administrative Work: Managing and paying for various expenses can require more administrative effort.
Risk of Cost Increases: If operating expenses rise significantly, your total monthly payments will increase.

Gross Lease vs. Net Lease: Key Differences

To summarize, here are the key differences between gross leases and net leases:

Responsibility for Operating Expenses: In a gross lease, the landlord covers most operating expenses, while in a net lease, the tenant pays a portion of these expenses.
Rental Amount: Gross leases have a fixed rent, while net leases involve a base rent plus variable operating expenses.
Budgeting: Gross leases offer predictable monthly payments, while net leases can have fluctuating costs.
Risk: Gross leases carry less risk for tenants regarding operating cost increases, while net leases shift some of that risk to the tenant.
Control: Net leases may offer more control over expenses and property management, while gross leases provide less control.

Which Lease Type is Right for You?

Choosing between a gross lease and a net lease depends on your business’s specific circumstances and priorities. Here are some factors to consider:

Budgeting Needs: If you need predictable monthly costs for budgeting purposes, a gross lease is preferable. If you are comfortable with variable costs and potential savings, a net lease might be suitable.
Financial Resources: If you have limited financial resources or prefer to avoid the risk of unexpected expenses, a gross lease is a safer option. If you have more financial flexibility and are willing to take on some risk for potential savings, a net lease could work.
Administrative Capacity: If you want to minimize administrative tasks, a gross lease is better. If you have the capacity to manage and pay for various operating expenses, a net lease is feasible.
Business Size and Stage: Small businesses and startups often prefer the simplicity and predictability of a gross lease. Larger, more established businesses might have the resources and expertise to manage a net lease.
Lease Term: For shorter lease terms, a gross lease might be more appealing due to its predictability. For longer lease terms, a net lease could offer more potential for savings if operating expenses remain stable or decrease.

Negotiating Lease Terms

Regardless of whether you choose a gross lease or a net lease, it’s essential to negotiate the lease terms carefully. Here are some tips:

Understand All Costs: Make sure you understand exactly what is included in the rent or what expenses you will be responsible for.
Review the Lease Agreement: Have a legal professional review the lease agreement to ensure it is fair and protects your interests.
Negotiate Expense Caps: In a net lease, try to negotiate caps on operating expenses to limit potential cost increases.
Ask for Transparency: Request detailed breakdowns of operating expenses to ensure you are paying a fair amount.
Consider Lease Term and Renewal Options: Negotiate favorable lease terms and renewal options to provide flexibility for your business.

Conclusion

Choosing the right type of commercial lease is a critical decision that can significantly impact your business’s financial health. Gross leases offer simplicity and predictability, while net leases provide potential savings and more control. By understanding the differences between these two lease types and carefully considering your business’s needs, you can make an informed choice that sets your business up for success. Remember to always review lease agreements thoroughly and seek professional advice when needed.

In the end, the best lease is the one that aligns with your business goals, financial capabilities, and operational needs. Whether you opt for the straightforward nature of a gross lease or the potential cost savings of a net lease, diligent planning and negotiation are key to securing a favorable agreement.

To learn more about Leasecake’s lease management platform and how we can help you grow your business, manage multiple locations, save money by understanding exactly what’s in your documents, and minimize the risk of overpaying or missing a lease renewal, schedule a demo.

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