NNN Leases vs Gross Leases
When it comes time for your small business to make the move toward leasing its own space, it’s normal to feel exhilarated, terrified, and confused all at once. Not only does this signal significant growth in your business, but it can also add a level of complexity to your business finances that can feel daunting at first. We here at Tower Realty Partners understand that the world of commercial real estate can leave you feeling confused, which is why we offer our expert services to help guide tenants, landlords, buyers, and owners through the oftentimes disorienting world of real estate in the Denver, Colorado area.
This blog post focuses on the difference between NNN leases and gross leases. If you haven’t heard these terms before, these two styles of leases cover a wide range of contracts offered by commercial real estate venues, as well as medical real estate development projects. Let’s start with a quick definition of each, before weighing the pros and cons.
NNN or “Triple Net” Leases
As far as acronyms go, this one can be somewhat confusing. NNN or “Triple Net” leases get their name thanks to tenants taking on the cost of real estate taxes, building insurance, and maintenance, thereby “netting” themselves three costs.
To break this down into simpler terms, the lessor or landlord of a property calculates the annual cost of maintenance or common area maintenance (CAM) on the space using the total area. Then, they include the property tax, insurance, and maintenance to the fees for the year, and break them into 12 separate payments. In most cases, NNN leases have the renters paying utilities and upkeep, such as plowing and landscaping costs. While landscaping may not be a big cost in some areas of the country, if we here in Colorado experience a larger snowfall than usual, you may find your monthly cost jumping through the roof if you have a NNN lease.
Gross leases are similar to the most common forms of residential housing leases on the market. In these leases, the tenant pays a flat sum that can include utilities, while the lessor or landlord is responsible for the taxes, insurance, and CAM of the property, as well as any cleaning services or landscaping needed for the building.
This type of lease is better served for larger properties with several rental units inside, as it streamlines calculating costs for each individual tenant. These leases tend to be more expensive than NNN leases, but conversely, business owners and renters do not need to worry about several changing costs, and can focus on one reoccurring payment.
Which Lease is Better for You?
As with any kind of lease, it’s always important to go over the terms with an expert. We here at Tower Realty Partners know the ins and outs of Colorado real estate, so we can help potential buyers or lessors understand what they can and cannot do under Colorado law, while also helping tenants understand what works best for their unique needs.
In general, NNN leases are good for those looking to have a closer level of control over their finances, as they can tailor their expenses based on the needs of the property and their utility usage. Maintenance costs can come out of nowhere on these leases, however, and can cause monthly costs to skyrocket, so budget management is a must with NNN leases.
While gross leases provide less flexibility than NNN leases, they do guarantee that your monthly cost will be the same, and Colorado law requires lessors to notify tenants of any rent changes in advance. Since lessors are required to maintain the property, this can take some of the stress off of business owners, as they can focus on growing their business without having to manage a property as well.