Commercial Lease Types: NNN vs Gross vs Modified Gross
Four structures decide who pays the operating expenses — and a $24 triple net quote can cost more than a $34 full service one. Here is how each works, what the base year really means, and how to put two quotes on the same basis.
The one question all four answer
Every commercial lease structure is an answer to a single question: who pays the operating expenses — the property taxes, the building insurance, the common area maintenance, the utilities. Base rent is only half of a quote. The structure is the other half, and it is the half that decides whether the number you were given is the number you will pay.
This matters most at the moment of comparison. A landlord quoting $24/SF triple net and one quoting $34/SF full service may be describing almost the same economics — or a difference of several dollars a foot. You cannot tell from the quotes. You have to normalize them.
The four structures
| Structure | Who pays operating expenses | Typical of |
|---|---|---|
| Triple net (NNN) | Tenant, in full, on top of base rent | Retail, industrial, single-tenant |
| Gross | Landlord, out of the rent collected | Smaller multi-tenant, some industrial |
| Modified gross | Landlord to the base-year level; tenant pays only the increase above it | Multi-tenant office |
| Full service | Landlord — everything bundled into one rate | Class A and multi-tenant office |
The base year is the part people get wrong
A modified gross lease does not pass the tenant its share of operating expenses. It passes the increase over a base year — almost always the first year of the term. The landlord keeps paying expenses at that base level for the whole lease, and the tenant picks up only what costs have grown by since.
The consequence is easy to state and easy to miss: a modified gross lease costs the tenant nothing in operating expenses in year one, by construction. It is not a concession and it is not a bargain. It is arithmetic, and it reverses steadily across the term.
Here is the same building under each structure — 10,000 SF, base-year operating expenses of $9.50/SF, escalating 3% a year. This is what the tenant pays in expenses:
| Year | Triple net | Modified gross | Full service |
|---|---|---|---|
| 1 | $95,000 | $0 | $0 |
| 2 | $97,850 | $2,850 | $0 |
| 3 | $100,786 | $5,785 | $0 |
| 4 | $103,809 | $8,809 | $0 |
| 5 | $106,923 | $11,923 | $0 |
Over five years the triple net tenant pays $504,368 in operating expenses, the modified gross tenant pays $29,368, and the full service tenant pays nothing separately. That $475,000 gap is not in either quoted rent. It lives entirely in the structure.
How to compare quotes written on different structures
The quick version is the gross equivalent: add the operating expense estimate to a triple net base rent and compare that to the full service rate. A $24 NNN quote with $9.50 of expenses is $33.50 gross-equivalent, which is a real comparison to a $34 full service quote.
But a gross equivalent is a year-one snapshot, and leases are not year-one instruments. A proper comparison runs both proposals across the entire term: escalations applied to rent and to expenses, free rent netted out, the tenant improvement allowance credited back, and the base year honoured if one of them is modified gross. Then it divides by square feet and years so the two land on one rate.
Two numbers come out of that, and they answer different questions. Net effective rent is the base rent net of concessions — what the rent is really worth once free months and TI are taken out. Effective occupancy cost is the same thing with operating expenses added, and it is the only one of the two that lets an NNN proposal be compared to a full service one at all. The lease comparison calculator computes both, for up to four proposals at once.
What the structure does to the landlord's NOI
The same structures that decide a tenant’s cost decide the landlord’s income, and the effect is larger than most rent rolls make visible.
Under triple net, expense reimbursements are income that largely offsets the operating expenses, so NOI tracks base rent closely and is insulated from cost inflation. Under full service the landlord absorbs those costs, so NOI is base rent minus expenses that rise every year — and a lease with flat rent and a full service structure loses real income annually without anything appearing to change.
Modified gross sits between the two and drifts across the term, which is exactly why it cannot be approximated. Two buildings with identical rent rolls and different structures produce materially different NOI, and therefore different cap rates at the same price. It is a per-suite fact, not a building-level assumption, and underwriting that treats it as one will be wrong in a direction it cannot see.
Frequently asked questions
What is a triple net (NNN) lease?
In a triple net lease the tenant pays base rent plus its share of the three 'nets' — property taxes, building insurance and common area maintenance — on top. The quoted rent is therefore only part of what the tenant actually pays, and the landlord's income is largely insulated from rising operating costs. NNN is the standard structure in retail and industrial, and it is why a $24/SF NNN quote and a $34/SF full service quote can describe almost the same deal.
What is the difference between a gross lease and a net lease?
In a gross lease the landlord pays the operating expenses out of the rent it collects, so the quoted rate is close to what the tenant actually pays. In a net lease the tenant pays operating expenses separately, on top of base rent. The practical consequence is who carries the risk of costs rising: in a gross lease the landlord absorbs an increase in taxes or insurance, and in a net lease the tenant does.
How does a modified gross lease actually work?
A modified gross lease sets a base year — usually the first year of the term — and the landlord pays the operating expenses at that level for the whole lease. The tenant pays only the increase above that base-year amount in later years. So the tenant's expense obligation is zero in year one by construction, and grows as costs rise. This is the structure most often misdescribed: it is not a share of total operating expenses, it is a share of the growth in them.
What is a full service gross lease?
A full service gross lease bundles everything into one number: base rent, operating expenses, utilities, janitorial and often in-suite services. The tenant pays the quoted rate and nothing else. It is common in multi-tenant office, and it makes budgeting simple for the tenant at the cost of paying a premium for the landlord carrying the expense risk. Note that many 'full service' leases still contain a base-year clause, so read the lease rather than the quote.
Which lease type is better for a tenant?
Neither is inherently better — they price differently and carry risk differently. A full service lease costs more per square foot but is predictable. A triple net lease quotes lower and exposes the tenant to whatever taxes, insurance and maintenance actually do over the term. The only way to compare them fairly is to put both on the same basis: total cost over the full term, net of free rent and any tenant improvement allowance, divided by square feet and years.
How do you compare an NNN quote to a full service quote?
Add the operating expense estimate to the NNN base rent to get a gross-equivalent rate, then compare that to the full service rate. But a gross-equivalent is only a year-one snapshot. A proper comparison runs both proposals over the whole term — applying escalations to rent and to expenses, netting out free rent and TI, and accounting for the base year if one of them is modified gross. That is what the lease comparison calculator does.
Do lease types affect the landlord's NOI?
Yes, substantially. Under a triple net lease, expense reimbursements are income to the landlord that largely offset the operating expenses, so NOI tracks base rent closely. Under a full service lease the landlord absorbs the expenses, so NOI is base rent minus real costs that rise every year. Two buildings with identical rent rolls and different lease structures produce very different NOI, which is why the structure has to be modelled per suite rather than assumed for the building.
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The structure is in the lease, not in the quote.
DealWise AI reads the lease and records the structure suite by suite — base year, reimbursements, escalations and all — then models what each one does to the income across the hold.