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       Analysis of Commercial Gross Leases and
                                   Net Leases

Net Commercial Leases

Most commercial leases are net leases.  Under a net lease,
certain predetermined costs incurred by the owner in the
operation of the commercial real estate project are passed onto
and paid by the tenant.  These contributions by the tenant to
the payment of the operational costs of the development are in
addition to the agreed upon periodic rent paid by the tenant.  

Often these contributions to the operational costs of the project
are in the form of advance payments by the tenant of the
estimated future operational costs of the project which are paid
along with each periodic rent payment.  In such an arrangement
the owner will estimate the amount of the annual operational
costs that are to be passed onto the tenant and the tenant
typically pays one-twelfth of these estimated costs each month.  
As the operational costs are incurred, they are paid from the
tenant contributions that have been collected.  At the end of the
year any excess contributions to the operational costs that were
collected by the owner are typically refunded to the tenant or
credited against future sums payable by the tenant.  However, if
the contributions to the operational expenses are insufficient to
pay these expenses then the owner will charge the tenants an
additional assessment to reconcile the amounts contributed by
the tenants and the actual operational costs.

Whatever form the net lease takes, it should obligate the owner
to provide an accounting to the tenant periodically, usually
annually.  Such an accounting will provide the tenant with a
breakdown of the operational expenses and reconcile the
contributions made by the tenant and these expenses.

While tenant’s contributions to the payment of the operational
expenses of the project under a net lease are often structured
with monthly payments of estimated future costs, other
arrangements are utilized though very infrequently.  Tenant
contributions to the operational costs may be paid annually,
biannually, or as costs accrue.  But such arrangements are not
favored by owners or tenants because they result in periodic,
sometimes substantial, payments for the tenant rather than
spreading the costs out over time.  Such payments are often
more difficult for the tenant to pay and for the owner to collect.

Differences in which operational expenses will be passed
through to and paid by the tenants accounts for the many
variations that exist in net leases.  But one common form of net
leases is the triple net or net/net/net lease.  With such a lease
structure, all operational costs are passed onto the tenant.  The
owner does not retain any liability for any operational costs.

                           Return to Analysis of Commercial Gross and Net Leases
Law Office of
Craig W. Little, P.A.