What is the Difference Between a Gross Lease and a Net Lease?

There are two main types of leases in real estate: a gross lease and a net lease. The major difference between the two lease types is how the tenant's costs are structured and paid.

Let's start with a gross lease. This is the kind of lease that most Americans are familiar with as they are what is typically used in a residential lease. However, a gross lease is also in commercial agreements. In commercial real estate, a gross lease is commonly referred to as a full-service lease.

In a gross lease agreement, the tenant is responsible for paying the landlord a flat rate figure in exchange for the use of the property. Their rent includes all property costs, such as insurance, property taxes, and routine repairs.

In some contracts, a gross lease can also include the utilities associated with a property. For example, it's common for landlords to include utilities in a rental fee if the unit doesn't have separate utility meters.

Now let's discuss a net lease. As opposed to a gross lease, a net lease will have a rental fee, but the tenant will also be responsible for a portion or all other costs associated with a property. The lease contract should clearly outline what a tenant is responsible for paying.

Net leases are primarily used in commercial situations. There are four types of net leases:

First, there is a single net lease, which requires a tenant to pay the property taxes on top of their monthly rental fee.

Next is a double net lease, which requires a tenant to pay the property taxes as well as the building insurance.

Third is a triple net lease, which requires a tenant to pay the property taxes, insurance, and most repair and maintenance costs. The landlord would only have to pay for any major issues, such as a new roof or to repair structural problems.

Last is an absolute net lease, which passes on nearly every cost associated with a property to the tenant, on top of their rental fee. For example, under an absolute lease, a landlord would not be required to replace a roof or conduct structural repairs, as they would in a triple net lease.  

Even though tenants must pay additional expenses in a net lease, they are generally made as payments or reimbursements to the landlord. Property taxes and insurance stay in the landlord's name, so they want to make sure that payments are made on time and don't default.

From a landlord’s perspective, net leases are desirable because they shift the responsibility of variable expenses to the tenant. However, net leases will typically have a lower rental rate when compared to a gross lease.

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