Gross Lease vs. Net Lease–What’s the best value?

When looking for office space, you will likely encounter a few different lease types.  What do the different leases mean and what is the best value?  In this article we will discuss each type of lease and how to compare your options.

If you have ever rented an apartment or condominium in the past, you likely paid your own utility bill on top of your normal monthly rent.  This arrangement is called a net lease.  It is different than the full service lease typical of most  office buildings.

Net lease.  A net lease requires the tenant to pay a base rent in addition to its share (or all) of operating expenses the building incurs–such as electricity, taxes, maintenance, and insurance.  Your base rent will be lower than that of a gross lease building, but your expenses can vary widely from month to month and account for an additional $5 to $8 per rentable square foot (RSF).  Net leases are typical of smaller multi-tenant or single occupant buildings.

Modified Gross.  Another lease arrangement you will encounter is the modified gross lease, similar to a full service lease, except the tenant pays just one or two additional items over base rent.  The extra charge is usually for electricity.  In Metairie, electricity alone accounts for an additional $2 to $3 dollars per RSF in a small single-occupant building versus about $1.00 to $1.50 in a larger multi-tenant building.

Example. Consider a tenant who occupies 2,000 RSF in an office building that charges $18 for a full service lease.  The tenant’s monthly rent will be $3,000 (($18 x 2,000 RSF) /12 months).  Under a modified gross lease, it may pay $17/RSF plus electricity costs averaging $2/RSF.  In this case, the monthly bill would average $3,167.

A net leased building may charge a seemingly low $15/RSF, but operating expenses could average $8/RSF.  The tenant would pay an average effective rate of $23/RSF ($15 + $18)–almost $10,000 more in rent per year.

Bottom line–ensure that you understand the type of lease arrangement your building is using and compare it to the alternatives.  While a full service lease may seem more expensive, the rate is all inclusive.  Larger multi-tenant office buildings may save you more money than smaller spaces with few tenants because larger buildings operate more efficiently and spread operating expenses over a larger tenant base.  One type of lease is not necessarily better than the others.  In order to compare them, you must find out all the costs of each lease type and add up them up.  Once you have gathered all the information, it will be easier to make a true comparison.

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