NNN vs Gross vs Modified Gross Leases

If you’re in the market for commercial real estate or looking for space to lease for your business, you will need to learn about the different ways leases can be structured. Although there are many types of commercial leases, the most common ones are the NNN lease, the gross lease, and the modified gross lease. Each type relates to who pays for the building’s operating expenses.

What Is an NNN Lease?

An NNN lease, also called a Net Net Net and Triple Net Lease, is a lease arrangement in which the tenant pays their base rent plus a proportionate share of all three net expenses:

• Property taxes
• Building insurance
• Common areas maintenance (maintenance of shared spaces, parking lots, landscaping, and HVAC systems)

The tenant pays these expenses in proportion to the amount of square footage they lease. For example, if the tenant leases 10,000 square feet in a 100,000 square foot building, their proportionate share of the expenses is 10%.

For tenants, NNN leases provide lower base rents and more control over property maintenance, but once the expenses are added, rents can be higher than under other lease arrangements. With an NNN lease, tenants also take on the risk of rising operating costs.

For landlords, a triple net lease protects them from increasing operating costs by downloading these costs onto the tenant. If they rent the entire property out to one tenant, landlords can also participate in the “single tenant triple net lease game,” a set of strategies that gives the landlord consistent income without active involvement in the property. The downsides of NNN leases for landlords are less control over the property’s maintenance and the requirement to find very high-quality tenants, which can be challenging in a competitive market.

What Is a Gross Lease?

In a gross lease arrangement, the tenant pays one all-inclusive monthly payment. The landlord includes all operating expenses in the lease payments and manages the expenses on the tenant’s behalf. For tenants, the main difference between an NNN and gross lease is that tenants know what their payments will be each month. However, their total costs will likely be higher with a gross lease than with an NNN lease because the landlord absorbs the risk of rising operating costs.

What Is a Modified Gross Lease?

A modified gross lease splits the difference between an NNN lease and a gross lease. With a modified gross lease, the tenant pays the base rent plus some of the property’s operating expenses, but not all of them. Which expenses fall to which party is negotiable, so there’s no universal definition of a modified gross lease: two leases in the same building can both be described as “modified gross leases” and have completely different structures for allocating expenses. Tenants must review lease terms carefully to understand what their total costs will be.

Many modified gross leases also use a base year concept: the first year’s operating expenses establish the base, and increases beyond that floor get passed on to the tenant in future years. This gives tenants more predictability than an NNN lease while still protecting landlords from long-term expense increases.

How to Compare Gross Lease vs Net Lease vs Modified Gross Lease

As a tenant, the cost of your lease is a major expense. Comparing properties is complicated by the different structures available. Follow these steps to make sure you know what your actual expenses will be:

• For any NNN or modified gross lease, ask the landlord for the current cost estimates in addition to the base rent.
• Confirm what’s included and what’s not included in the lease. Get a written list so you can compare across properties. Note that modified gross is not a standardized term, and that cost allocation can vary widely, even in the same building.
• Account for cost and variability. Ask the landlord for historical expense figures for the property so you can see how stable or volatile those changes have been. Ask if the lease includes a ceiling on common area maintenance expenses that could be charged to you.
• If the lease has a base year provision, find out what year is being used as the base and what the operating expenses were in that year. A base year from several years ago may mean that you’ll be paying significantly more for expenses.
• Do a five-year cost comparison for each option, using a 2% to 4% per year increase in expenses. Use this comparison to evaluate which option is the most cost-effective.

Lease Type Meaning for Investors

If you’re investing in real estate, the lease structure matters as much as your return on investment.

• Investors looking for commercial real estate with predictable, hands-off income should choose NNN properties and lease structures.
• Gross lease properties typically require more active management, and the landlord usually absorbs cost fluctuations, which can mean smaller net operating income when expenses rise. However, gross lease properties can charge higher rents.
• Modified gross properties offer a middle ground where the landlord shares expense risk with tenants. This can make income less volatile compared to a gross lease while keeping property management demands in check.

Overview: Comparing Lease Types

Frequently Asked Questions About Lease Types

What’s the Difference Between an NNN Lease and a Gross Lease?

In an NNN lease, the tenant pays base rent plus property taxes, building insurance, and common area maintenance. In a gross lease, those costs are combined into one flat monthly payment, with the landlord handling the operating expenses on the tenant’s behalf. With an NNN lease, the tenant bears the risk of increased expenses; with a gross lease, the landlord assumes the risk.

What Do Tenants Pay in an NNN Lease?

In addition to base rent, NNN tenants pay their proportionate share of property taxes, building insurance, and common area maintenance. These charges are typically estimated by the landlord at the start of each year and billed to the tenant monthly, with an annual reconciliation against actual costs.

Is a Modified Gross Lease Better for Tenants?

This depends on the specific terms of the lease. “Modified gross” isn’t a standardized term, so two leases with that label can have very different cost allocations. A modified gross lease is only better for tenants if the specific terms clearly define which expenses the landlord covers and ideally include caps on the expenses the tenant pays. Always review the lease terms clause-by-clause.

What Lease Type Has the Lowest Risk for Tenants?

If you need cost predictability, look for a gross lease, where all your expenses are included in one simple payment. For more control over your expenses and the maintenance of the building, opt for an NNN lease. A modified gross lease will land you in the middle of these options, but the expenses that are included in your lease payments can vary from one building to the next, and even within the same building.