Commercial Investment Property – Net and Gross Rent Strategies to Improve Property Performance
When acting on behalf of the landlord in leasing commercial or retail property it is essential to understand the rent structures that suit the legal circumstances of the property and also the landlord’s investment plans. So we have net and gross rents to consider and use in our leasing strategies. Which ones do we choose?
Net rents are a useful strategy to recover part or all of the landlord’s property operating costs, but there are several variations of net rent. Gross rents also have a place in the property performance plan.
As the leasing or managing agent it pays for you to understand what rental situation best suits the landlord’s needs and the local laws as they apply to leasing of the premises. Here are some key lease rental differences and variations.
From the outset let’s detail what a gross lease is and why it would be used. A gross lease is that which applies as one basic rental that puts the obligations fully on the landlord to pay for all rates and taxes, insurance, property running costs, and maintenance. The tenant does not pay for these as a direct payment or reimbursement. Logic says that a landlord using a gross rent strategy should ask for a gross rent that offsets and recovers the financial burden of the outgoings normally payable for that tenancy by the tenant under a net rent. A gross rent is therefore higher than a net rent for this very reason. A gross rent is usually a rent that includes a component to the value of outgoings plus a projection for inflation on those outgoings. It is very easy to apply a fixed percentage rent review to a gross lease. The landlord has to take the risk of this process so the calculation of the gross rent has to be carefully considered. A gross lease does not normally require any outgoings reconciliation or adjustment so it is a rent of choice when it comes to property management. Importantly the gross rental number has to be well considered and set at lease negotiation time; if this is not done, the landlord can set a rent that loses them money over time.
Net rent is essentially a rent that is paid by the tenant plus a component of outgoings for the premises that they occupy. The largely forgotten or underutilized fact of net rent is that there are variations. Some tenants (usually the larger ones) will contribute towards rates and taxes only. Other smaller tenants will contribute towards rates and taxes plus insurance; and finally some smaller tenants will contribute towards rates and taxes, insurance, and all building running costs. From a landlord’s viewpoint, the base net rent should be adjusted upwards if the tenant is only paying for some of the outgoings for the premises; in that way the landlord gets back the building operational costs. In the case of outgoings contributions it is necessary that a landlord comply with legislation regards outgoings disclosures, reconciliations, and notices.
So what rent is best? They both are, however the landlord and the property manager should consult on what rent is acceptable for the premises, the market, and the tenant. On that basis a good lease can be created.