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Net versus Gross Lease… What Does It All Mean?

You are a tenant looking for commercial space to lease. You start your search by checking the local Kijiji ads and maybe check with a few colleagues when you realise that perhaps you are in over your head. One ad is asking for $14/ft.² net plus operating and taxes, while another is asking $3,500 per month gross. How do you compare these two rents?

Or perhaps you are a new landlord, eager to fill up your new investment property and start making a return. You are not sure what to charge for rent, but you want to ensure that all of your operating expenses are recovered at the end of each operating year and you are not out of pocket for any expenses.

First, let’s summarise the rental terminology:

Net Rent: Often called “Base Rent”. This is what you pay for the right to occupy a given space

Additional Rent: Often called “Common Area Maintenance (CAM) and Realty Taxes” or “Service Rent”: This is the cost of operating a given space or property. It includes such things as electricity, heat, garbage removal, snow clearing, etc. It is typically paid for by the landlord and then recharged to the tenant on a per square foot basis.

Gross Rent: This is the sum of all rent paid (Net and Additional Rent).

In order to compare a net and gross lease, the rents must be converted to the same basis (ie: both must be compared on a per square foot basis, or both on a monthly rental basis). For example: let’s say that a particular unit is 1,500 ft.2 and it is being offered at a Net Rent of $14/ft.² and CAM and Taxes of $11/ft.². Converting this to a monthly rent is as follows:

($14/ft.² + $11/ft.²) X 1,500 ft.² = $37,500 annual or $3,125 per month.

Alternatively, if you are provided with a rental rate of $3,500 per month gross for a 1,500 ft.² space, converting this to a per square foot rent is as follows:

$3,500 per month X 12 = $42,000 per annum / 1,500 ft.² = $28.00/ft.²

Now that you know how to calculate and compare net and gross rental rates…which one is better? A net lease or a gross lease?…well it depends which side of the lease you are standing on. The main difference between a net and gross lease, comes down to who shoulders the risk of increasing operating costs. Under a gross lease, a tenant has committed to a set amount of rent for the lease term. If the operating costs increase during the term of that lease term, the landlord “eats” those costs, thereby cutting into his/her effective rent. Under a net lease however, the Additional Rent charged for operating costs fluctuates throughout the term of the lease. Since landlords are recharging the tenants for common area costs, any increases are simply passed on to the tenant. Tenants may prefer a gross lease since it represents a steady and guaranteed rent, and no risk of increasing common area costs during the length of the lease. Landlords on the other hand tend to prefer a net lease where there is a steady and guaranteed base rent, and any risk of increased expenses is simply passed along to the tenant.

Ashley Urquhart is the Senior Manager of our Brokerage Division. She has a vast network of contacts and would be happy to assist you with all your leasing needs. Feel free to contact Ashley at (902) 429-1811 or .

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