Commerical Real Estate Key Terms
Topics: commerical real estate
A Gross lease is a gross lease is a lease in which you as the owner pay most or all of the expenses. In a gross lease, you are responsible for paying the property taxes, insurance, and the maintenance of the building. That is your responsibility. It’s similar to a lease you would have with an apartment property. Usually when you own an apartment building, when the tenant pays you rent, you take a part of that rent to pay your share of taxes, insurance, maintenance, etc. The same would apply under a gross lease scenario with an office building. The tenant just pays you a monthly amount of rent and you go ahead and you take that amount and you pay your pro rated share of taxes, insurance, maintenance, etc.
A Net lease is a net lease is an interesting situation in as much as this is where the tenant pays most of the expenses. In other words, in a net lease, the rent is discounted and because the rent is discounted, the tenant does pay all the other expenses. For example, the tenant pays property taxes, insurance, maintenance, etc. based on their proportionate share of the building. In other words, if you had a 10,000 square foot office building with two tenants, and you had net leases in place, each tenant would pay 50% of the property taxes, insurance, maintenance, etc. They would pay all of those costs you would pay none. However, keep in mind, under a net lease, the lease amount that the tenant pays is discounted compared to a gross lease. For example, in a similar building, the gross lease would be $20 a square foot with you the owner paying all of the expenses. Under a net lease situation, the lease rate may be $10 a square foot; however, under that scenario, the tenant pay
s all of those expenses.
Office building leases many times have options. The options are for the good of the tenant. Many leases when they are drafted, the tenant will want to do the following: lease your space for two years, but have an option to lease for another two years. What you are doing is you’re basically giving the tenant permission or an option on that space for an additional two years. Usually, the options are negotiated ahead of time versus that the time the option could be exercised. What this does for the tenant is that they know they literally have control over the space in this last example for four years. They rent it for two years but they can also rent it for an additional two years if they so choose to do so.
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