NNN vs. Gross Lease: Who Pays What in a Commercial Lease

When looking at commercial real estate, the rental rate is only part of the story. The type of lease determines who pays the property’s operating expenses—and that can make a major difference in the true cost of a lease or the return on an investment.

Two of the most common structures are triple net (NNN) and gross leases. Here’s what you need to know.

What Is a Triple Net (NNN) Lease?
With a triple net lease, the tenant pays the base rent plus three major property expenses:
• Property taxes
• Building insurance
• Maintenance and common area expenses (CAM)

Because many of the property’s operating expenses are passed through to the tenant, the landlord generally receives more predictable income with fewer day-to-day expenses to manage.

This is one reason NNN properties are popular with investors looking for relatively passive income. They are commonly found in single-tenant retail properties, drugstores, quick-service restaurants, and ground leases.

What Is a Gross Lease?
With a gross lease, the tenant generally pays one rental amount, and the landlord pays the property’s operating expenses from that rent.

This makes occupancy costs easier for the tenant to understand and budget. For the landlord, however, rising property taxes, insurance premiums, maintenance costs, and other expenses can reduce the property’s net income.

Gross leases are common in office buildings and some multi-tenant properties.

What Is a Modified Gross Lease?
Not every lease fits neatly into one category.

A modified gross lease divides expenses between the landlord and tenant. For example, the landlord may pay operating expenses up to an agreed amount, while the tenant is responsible for increases above that level.

The exact arrangement varies, which is why it is important to understand the expense provisions in the lease - not simply the rental rate.

Which Lease Is Better for an Investor?
It depends on the investor’s goals.

A well-structured NNN lease can provide predictable income and require less hands-on management because many property expenses are the tenant’s responsibility.

A gross or modified gross property requires the owner to take on more expense risk, but it can also provide greater control over the building and opportunities to increase value through effective management.

The key is understanding who is responsible for each expense and how rising costs could affect the investment over time.

What Does This Mean for Tenants?
This is where comparing properties can get confusing.

Suppose one space is advertised at $15 per square foot NNN and another at $26 per square foot gross. At first glance, the $15 space looks much cheaper.

But it may not be.

Once taxes, insurance, CAM, and other pass-through expenses are added to the NNN rate, the tenant’s actual cost could be significantly higher. Depending on the property, those additional expenses can add several dollars per square foot - or more.

That’s why tenants should compare the total occupancy cost, not simply the advertised rental rate.

The Bottom Line
The simplest way to think about these leases is who pays the building’s expenses?

With a NNN lease, more of those expenses are passed to the tenant, giving the landlord more predictable net income.

With a gross lease, the landlord generally pays the operating expenses, giving the tenant greater predictability but leaving the owner responsible for increases in those costs.

A modified gross lease falls somewhere in between.

Whether you are leasing space or purchasing an investment property, understanding the lease structure can help you avoid expensive surprises.

If you are evaluating a commercial lease or leased investment in Metro Atlanta and want help understanding what the numbers really mean, visit Southern Equity Commercial or contact me directly.

Mark Ellsworth
Principal Broker | Southern Equity Commercial
Serving Metro Atlanta and the Southeast
mark.ellsworth@kw.com | 404-449-6275