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Lease Types and Rent Equivalencies

Blog by Andrew Reid | February 14th, 2021

Gross leases: Gross leases are also known as full-service leases, in which the landlord pays all operating expenses including electricity, gas, cleaning, security, landscaping, and elevator, as well as waste removal and recycling. You might find this type of lease in multi-unit and single-unit office and industrial properties although in the Canadian market gross commercial leases are extremely rare. This type of lease works well for tenants since there are no surprise expenses for proportional charge-backs for common area upgrades, which makes it easy for business owners to budget and forecast rental expense into the future, including predetermined rent escalations.

Net Lease: Net lease or triple net (NNN) is the predominant form of commercial lease for office and industrial space. In a triple net lease, the rent is separated into base rent and expenses. All operating expenses are passed through to the tenants, including taxes, insurance, common area upgrades, building repairs, and maintenance, on a pro-rata basis. The net rent is calculated using the previous year’s expenses and is charged to the tenant monthly. At the end of the year, all actual expenses are calculated and the tenant is charged an expense reimbursement. Since there can be wide variation in industrial and office tenants’ utility usage, triple net leases protect the landlord (Geltner, p.785).

Hybrid lease: As the name suggests, this type of lease is comprised of elements of both the gross and net lease. In a hybrid lease, the landlord and tenant are both responsible for the payment of the expenses, and the lease agreement stipulates which expenses the landlord will pay and which ones the tenant must cover. The hybrid lease is common in multifamily property in which the landlord pays insurance, property taxes, and all building maintenance, but the tenant’s apartment is metered separately for utilities which they pay directly to the service provider.

Geltner, Miller, Clayton, Eichholtz (2014). Commercial Real Estate: Analysis and Investment. OnCourse Learning, Mason OH