When searching for office space, you’ll no doubt come across many different types of commercial leases. Two of the most popular are triple net leases (or NNN leases) and gross leases. While both are common, they have significant differences, so it’s important to familiarize yourself with both when shopping for real estate.
Different lease types exist primarily to divide up the expenses of running the property in different ways. It’s crucial to understand who’s responsible for what before you enter into any lease agreement.
So, what’s the difference between a triple net lease and a gross lease? Before we dive into the details, let’s start with a simpler question.
What is a lease?
Put simply, a lease is a contractual agreement between somebody who owns an asset (a lessor) and somebody who wants the right to use that asset (a lessee). That asset can be almost anything, including vehicles, land, homes, equipment, and office space.
In this article, we’re talking about property leases, specifically commercial leases. Each of the leases we’re discussing is a different way of calculating which party pays for what, and who takes on the risk and responsibility of shared building expenses.
Market forces tend to even out the cost differences between each type of lease structure over a long-enough term, so you’ll often find that no single type of lease is cheaper or better overall. Which one works best for you—as either a tenant or a landlord—is subjective and comes down to individual circumstances as well as the wider trends of the property market.
Different types of leases
Triple net lease (NNN)
In a triple net lease, the tenant is responsible for paying the base rent to the landlord, plus three key expenses: the cost of common area maintenance, property taxes, and building insurance.
Absolute net lease
In an absolute net lease, the tenant is responsible for almost everything. That includes the base rent, plus the costs of a triple net lease as described above. On top of that, the tenant is on the hook for any major repairs to the property, such as replacing the roof, structure, and windows.
Modified gross lease
A modified gross lease is a more straightforward and flexible agreement between a tenant and a landlord. Under a modified gross lease, the rent quoted includes everything—that is, the base rent, common area maintenance, property taxes, and building insurance—but typically excludes utility bills or other costs.
A full-service lease is a type of gross lease in which the rent is paid as a single lump sum to the landlord, who uses that money to cover every expense involved in the property’s operation. This includes the base rent, maintenance, property taxes, building insurance, and utilities.
What is a triple net (NNN) lease?
The triple net lease is the most common type of lease you’ll encounter when searching for commercial real estate. This type of lease requires the tenant of a property to pay for three net costs on top of their base rent. Those costs are taxes, maintenance, and insurance.
A triple net lease is the flipside to a gross lease, where the tenant pays a simplified, all-inclusive rent to the landlord, who uses that cash to cover the expenses of running the building as they see fit.
Triple net lease operation
In a typical triple net lease, the additional costs of maintenance, insurance, and taxes are passed through to the tenant every month and are proportional to the tenant’s share of the whole building. In this way, the base rent and the three nets are paid for simultaneously. This isn’t always the case. In some triple net leases, the additional expenses can be charged to the tenant on a quarterly or annual basis.
The three N’s in a triple net lease refer to the three pass-through expenses the tenant must pay for on top of their rent. Because these costs are paid directly by the tenant, the tenant has a greater degree of control and oversight over how their money is spent and the standard of service they receive in return.
- Maintenance: Common area maintenance refers to the charges involved in the upkeep, renovation, and repair of the shared parts of the building, such as hallways, elevators, lobbies, restrooms, and parking lots.
- Taxes: Property taxes are paid to the local government to cover the public cost of servicing the building and the surrounding community, and are typically based on the value of the property. It pays for everything from road infrastructure and waste collection to law enforcement and fire protection.
- Insurance: Building insurance protects the owner from the cost of rebuilding or repairing the property following unexpected events like flooding, fires, or storm damage. It can also include liability insurance to cover against claims for injury suffered while on the property.
Triple net lease quotes
An office space listing with a triple net lease will usually quote the base rent. For example, a commercial property might be listed as “$32 per foot, triple net” or “$32/sq ft/year, NNN.” If not shown, you might have to ask the landlord or agent how much the pass-through expenses cost. These are ordinarily given per square foot, so they can be easily added to the base rent.
Triple net lease pros and cons
- Fewer responsibilities for the landlord. Because the tenant is responsible for the costs of common area maintenance, taxes, and building insurance, the landlord doesn’t have to worry about micromanaging these parts of the lease on a month-to-month basis.
- Passive income for the landlord. From the landlord’s perspective, triple net leases are relatively hands-off compared to a gross lease, and so they’re ideally structured to generate a reliable stream of passive rental income.
- Unexpected charges are covered by the lessee. Any increase in the cost of running a building will eventually be recouped in any type of commercial real estate lease, but a triple net lease protects the landlord from short-term fluctuations in the cost of property taxes and common area maintenance fees.
- Lower base rent for the tenant. Because the tenant is paying all of the building’s expenses themselves, the base rent in a triple net lease is usually lower than other types of leases.
- Shared expenses can rise. Depending on the specific terms of the triple net lease, an uptick in vacancies in a building can mean a sudden increase in the shared expenses a single tenant is expected to cover.
- High renovation costs for the tenant. Because expenses are passed through from the landlord to the tenant, any renovation costs are effectively paid by the tenant up-front rather than paid back through marginally increased rent over the entire term of the lease.
What is a gross lease?
In a gross lease, the rent is an easy-to-understand, all-inclusive amount. This is a more straightforward way of calculating what the landlord is owed, as the tenant pays a lump sum that includes their base rent plus the usual NNN expenses mentioned above.
Gross lease operation
In a full-service gross lease, even the utilities are rolled into the rent charge. This protects the tenant from the variable cost of things like electricity and water, so they can more easily forecast their costs without worrying about unexpected bills.
A modified gross lease includes only the base rent and the NNN expenses, but passes the cost of utilities and any other expenses through to the tenant.
Gross lease quotes
You’ll usually see a gross lease quoted as a single amount per square foot. It will also be obvious whether the lease is modified gross or full-service. For example, a gross lease could appear as “$50/sq ft/year, modified gross.”
Gross lease pros and cons
- Higher rent for the landlord. Because a gross lease combines all of the building’s major expenses into a single, all-inclusive quote, the actual rent paid to the landlord is higher. And since the landlord is responsible for funding and managing the building’s upkeep, they can better control these costs.
- Exact monthly rental cost for the tenant. Since everything is included in a full-service lease, the amount paid by the tenant shouldn’t fluctuate over the course of the term. In a modified gross lease, the cost of metered utilities will change from month to month, but a tenant will still enjoy much greater stability in their financial plans compared to a triple net lease.
- Higher rent for the tenant. The obvious reciprocal to the above is that, as a tenant, you’ll be the one paying more in rent. In exchange for this, the tenant is insulated from any fluctuating costs of maintenance, tax, and insurance.
- Unexpected expenses for the landlord. In a gross lease, common area maintenance (CAM) charges and other costs are the landlord’s responsibility. If these expenses suddenly rise, say, because an elevator needs repairing or energy prices increase, then the landlord takes the hit.
A triple net (NNN) lease versus a gross lease
Let’s summarize the key differences between triple net leases and gross leases.
A triple net lease places the responsibility and risk of managing the property with the tenant, who in return pays a lower base rent. This means the landlord can take a more hands-off approach to property upkeep and collect a more stable rental income, making triple net leases an enticing proposition for owners with large portfolios.
For the tenant, taking on the burden of managing the property themselves comes with upsides. A tenant in a triple net lease has complete control over their business expenses and can audit CAM providers and book their own contractors to save on costs. A counterpoint to this is that the tenant is on the hook for unexpected repairs or other nasty surprises, which would be paid for by the landlord in a gross lease.
In a gross lease, the landlord pays for all expenses associated with running the property, and the tenant pays a higher base rent to cover this. A modified gross lease passes some expenses through to the tenant, usually metered utilities such as water and electricity. This greatly simplifies the tenant’s budget, as they no longer have to worry about operating costs rising and falling. However, it also removes the tenant’s ability to keep those operating costs down.
There are pros and cons to both types of leases. Triple net leases generally favor landlords, as they shift risk to the tenants, while full-service and modified gross leases have benefits for both parties and can be negotiated to strike an amenable balance. Working with a real estate broker, and understanding how these lease structures differ and which responsibilities you’re willing to take on, is key to knowing which one is best for your business.
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Steve Hogarty is a writer and journalist based in London. He is the travel editor of City AM newspaper and the deputy editor of City AM Magazine, where his work focuses on technology, travel, and entertainment.