What is a Gross Lease vs a Net Lease?
If you’re an early childhood education business owner navigating real estate decisions, understanding your lease structure is critical, whether you’re operating, expanding, or planning to sell.
Depending on your goals, lease structure can impact your business in different ways. For operators focused on growth or expansion, it affects cash flow and responsibilities. For those preparing to sell, it can influence buyer perception, valuation, and deal terms. Knowing the difference between gross and net leases helps you make more strategic, financially sound decisions as you grow or prepare for a future transition.
This guide will walk you through the main types of commercial leases —[GU1.1] including gross leases, modified gross leases, net leases (N, NN, NNN), absolute net leases, and percentage leases — explain their pros and cons, and provide real world examples for ECE owners.
What is a Gross Lease?
A gross lease is a lease where the tenant pays a single, flat monthly rental fee, and the landlord covers most or all property-related expenses, including property taxes, insurance, maintenance, and utilities.
Gross leases are more commonly found in older buildings, multi-tenant strip centers, or in unique community-based settings such as co-ops or faith-based facilities.
ECE Example:
An independent preschool leasing space in a retail facility pays one flat fee for rent each month, with the landlord covering utilities, property taxes and insurance, and basic repairs and maintenance.
Advantages to the Tenant of Gross Lease Structures
Predictable monthly costs: One bill, no surprises
Easier budgeting: Helpful for newer operators or small businesses
Minimal property management responsibilities: Frees up time to focus on operations
Disadvantages to the Tenant of Gross Lease Structures
Higher base rent: Expenses are bundled
Less control over service quality: Landlord chooses vendors and schedules maintenance
For early education real estate owners who lease our their properties, the effects are reversed (e.g. those landlords retain more responsibility but have greater control over their property more responsibility but greater control over how expenses are managed).
What Is a Modified Gross Lease?
A modified gross lease blends features of gross and net leases. The landlord may cover property taxes, insurance, and maintenance for the first year (or up to a base amount). After that, the tenant pays for any increases above the base year amount.
ECE Example:
A Montessori school leases space in a commercial office park. During year one, taxes and insurance are included in rent. In future years, the tenant reimburses the landlord for increases in those costs.
Advantages to the Tenant of Modified Gross Lease Structures
Predictable costs in the first year or base period
Shared responsibility helps reduce landlord or tenant risk
Easier to transition from a gross lease to a net lease arrangement over time
Disadvantages to the Tenant of Modified Gross Lease Structures
Costs may increase each year as taxes and insurance rise
Requires close review of lease terms to avoid surprises
Slightly more complex to manage than a traditional gross lease
This type of lease can provide a balance of predictability and shared responsibility, which appeals to growing operators.
What is a Net Lease?
In a net lease, the tenant pays a lower base rent but also pays for some or all property expenses.
Types of Net Leases
Single Net (N): Tenant pays rent and property taxes
Double Net (NN): Tenant pays rent plus taxes and insurance
Triple Net (NNN): Tenant pays rent plus taxes, insurance, and maintenance
ECE Example:
A multi-site childcare operator signs a 15-year triple net lease after selling its property to an investor. This gives the operator control over repairs and expenses while keeping rent lower.
Net leases have become the standard in early education real estate and are common across single- and multi-site operations, as well as in sale-leaseback transactions. Below are some common advantages and tradeoffs of a net lease structure for ECE operators to consider.
Advantages of Net Lease Structures
Greater control over service vendors and repairs
Lower base rent, with more transparency into actual costs
Disadvantages of Net Lease Structures
Variable monthly costs that can fluctuate with taxes or repairs
More administrative work to manage vendors and pay separate bills
For owner-landlords, net leases often mean fewer responsibilities but also less visibility (depending on the language of the lease) into how the property is maintained.
What is an Absolute Net (Bondable) Lease?
An absolute net lease is the most landlord-friendly structure. The tenant pays for everything, including structural repairs like roof or foundation replacement. These leases are often non-cancelable and used in long-term, single-tenant investment properties.
ECE Example:
An ECE owner sells their property to an institutional investor and signs a 20-year absolute net lease. The school retains full responsibility for every aspect of property upkeep, including major capital repairs.
Advantages of Absolute Net Lease Structures
Maximum control over property maintenance and operations
Often comes with a long lease term, providing location stability
Attractive to real estate investors, which can increase property value when selling
Disadvantages of Absolute Net Lease Structures
Tenant assumes all financial risk, including major capital repairs
Higher operating costs and administrative burden
Non-cancelable terms can make it hard to exit or renegotiate
What is a Percentage Lease?
A percentage lease combines a fixed base rent with a percentage of the tenant’s gross revenue after reaching a certain sales threshold. This type of lease is most common in retail or mixed-use developments where the landlord’s income can scale with the tenant’s success.
ECE Example:
A childcare center in a mixed-use development agrees to pay a lower monthly base rent plus 3% of revenue above a set threshold. This helps keep costs manageable during slower seasons but increases rent during peak enrollment periods.
Advantages of Percentage Lease Structures
Lower fixed rent compared to other lease types
Landlord has a vested interest in the success of the business
Can provide flexibility for seasonal or fluctuating revenue
Disadvantages of Percentage Lease Structures
Rent expense can rise significantly during high-revenue months
Requires accurate financial reporting and transparency
Less common in ECE, making negotiation more complex
Comparing Lease Types
| Lease Type | Who Pays Expenses? | Predictability | Common in ECE? | Example Use Case |
|---|---|---|---|---|
| Gross Lease | Landlord covers all | High | Sometimes (older strip malls, faith-based facilities) | Independent preschool with one fixed rent |
| Modified Gross | Shared (landlord covers base year, tenant pays increases) | Medium | Moderate | Center in office/medical building with annual reconciliations |
| Net Lease (N/NN/NNN) | Tenant covers some or all expenses | Low-Medium | Very common | Sale-leaseback deal with investor |
| Absolute Net | Tenant covers all, including structural | Low | Less common | Long-term, single-tenant investor deal |
| Percentage Lease | Base rent + % of revenue | Variable | Rare | Shared retail or mixed-use property |
How Lease Structure Impacts Your Business
Choosing the right lease structure affects more than just rent, whether you’re a tenant or a landlord. It also affects:
EBITDA and Cash Flow: Lease structure determines which operating expenses you’re responsible for, directly impacting margins and financial performance.
Valuation: For owners considering a future sale, lease terms will influence how buyers assess the business and property value.
Flexibility and Transferability: Gross leases are simpler and good for new operators. Net leases are better for experienced operators looking for more control.
Market Considerations for ECE Owners
Economic Uncertainty: Gross leases help control costs and protect cash flow when markets are volatile.
Scaling Up: Net or NNN leases often make sense for multi-site operators who want vendor control and plan to hold long-term.
Selling for Max Value: Well-structured NNN leases with strong tenants usually command higher property valuations.
FAQs: Gross Lease vs. Net Lease
What is the difference between a gross and net lease?
A gross lease includes all property expenses in one flat rent payment, while a net lease separates those costs, so the tenant pays some or all directly.
Which lease structure is better for childcare centers?
It depends on your goals. Gross leases are best for predictability and simplicity. Net leases (especially NNN) are preferred by buyers and investors if you plan to sell.
What is included in a triple net lease?
The Tenant is responsible to pay property taxes, building insurance, and repairs & maintenance, in addition to rent.
Can I switch from a gross lease to a net lease before selling?
Yes. Many owners renegotiate leases before selling to make them more attractive to investors, but legal and financial implications should be reviewed first.
Navigate Your Early Education Real Estate Strategy with HINGE Advisors
Whether you lease your facility, own and operate your property, or are preparing to sell, aligning your lease structure with your short- and long-term business goals is key.
Need help navigating your lease or planning a real estate strategy? Whether you’re looking to sell, expand, or hold your property as a long-term investment, HINGE Early Education Advisors’ real estate services are designed to help early education owners unlock value and make informed decisions. If you’re ready to take the next step, contact us to learn more.