Two listings for similar space quote $23.50 and $15.50 per square foot. The cheaper one may not be cheaper. The difference is usually who pays the building’s operating costs, and the lease type says how those costs are split.
This article explains gross, modified gross and triple net leases, then prices the same space under each one over five years.
Three costs, three labels
A commercial building has three main operating costs beyond the mortgage:
- Property taxes, billed by the county
- Insurance on the building
- Common area maintenance (CAM): snow removal, parking lot upkeep, landscaping, shared utilities and repairs
The lease type is shorthand for who pays them. In a gross lease, the landlord pays and builds the cost into the rent. In a triple net (NNN) lease, the tenant pays its share of all three on top of base rent. A modified gross lease splits them somewhere in between.
The labels are loose. Two leases both called “modified gross” can split costs in completely different ways. The clause decides, not the name.
Gross: the landlord carries it
In a gross lease, the tenant pays one rent and the landlord pays the operating costs. In a full-service gross lease, often used in multi-tenant office buildings, the landlord may also pay utilities and janitorial.
The tenant gets a predictable number. The landlord carries the risk that taxes, insurance or maintenance rise faster than the rent does. Landlords price that risk into the rent, which is why gross rents look higher.
Modified gross: base years and stops
A modified gross lease usually starts with a gross rent, then passes some costs to the tenant. Two methods are typical:
- Base year. The tenant pays its share of any increase in operating costs above a named year, often the first year of the lease.
- Expense stop. The tenant pays its share of costs above a fixed amount per square foot, such as $7.00.
Say the building’s operating costs in the base year are $7.25 per square foot, and three years later they are $7.99. A tenant with 3,000 square feet pays the increase:
$7.99 less $7.25 = $0.74 per square foot
$0.74 × 3,000 square feet = $2,220 for that year
Modified gross leases also vary in which costs they pass through. Some pass only taxes and insurance increases. Some have the tenant pay its own utilities and janitorial. Read the definition.
Triple net: the tenant carries it
In a triple net lease, the tenant pays base rent plus its share of taxes, insurance and CAM, usually as monthly estimates reconciled once a year. The landlord’s income is the base rent, and the tenant carries the risk of rising costs.
Some net leases go further. In an absolute net lease, the tenant may also be responsible for the roof, the structure and major systems. Whether that is the case is in the repair and maintenance section, not the rent section.
The tax line can be the largest of the three. In Wyoming, commercial property is assessed at 9.5% of market value, per Teton County’s guide to determining property tax, and the tax is that assessed value times the local mill levy. A reassessment shows up in a net tenant’s next reconciliation.
The same space, three ways
The numbers here are illustrative. Say a business is choosing between three offers for 3,000 square feet of retail space in Casper, each a five-year lease with base rent rising 3% a year:
- Gross: $23.50 per square foot; the landlord pays taxes, insurance, CAM and utilities
- Modified gross: $22.00 per square foot; the tenant pays its own utilities (about $1.25) and its share of building costs above a first-year base
- Triple net: $15.50 per square foot, plus building costs estimated at $7.25 and the tenant’s own utilities
Assume building costs of $7.25 per square foot rise 5% a year. First-year cost per square foot:
- Gross: $23.50
- Modified gross: $22.00 + $1.25 = $23.25
- Triple net: $15.50 + $7.25 + $1.25 = $24.00
The headline rents differ by $8.00. The first-year costs differ by $0.75. Over five years:
| Lease type | First-year cost per sq ft | Five-year total | Five-year total if costs jump |
|---|---|---|---|
| Gross | $23.50 | $374,294 | $374,294 |
| Modified gross | $23.25 | $380,585 | $399,484 |
| Triple net | $24.00 | $385,807 | $404,706 |
The last column assumes building costs rise 25% in year three and stay there, say from an insurance increase and a reassessment. The gross tenant’s cost does not change; the landlord absorbs it. The other two tenants pay it.
On these assumptions the three offers cost within about 3% of each other in a normal run. They differ much more in who bears the surprise. A tenant that values a fixed budget may pay for the gross lease. A tenant that wants the lowest expected cost, and can absorb a bad year, may prefer the net lease.
The lease cost calculator runs the same comparison on your own numbers.
What the label leaves out
Even once you know the lease type, these terms decide the real cost:
- Exclusions: which costs the landlord may not pass through
- Capital items: whether a new roof or parking lot can be charged, and over how many years
- Caps: limits on how much passed-through costs can rise each year
- Admin fee: a percentage added to CAM, and what it is charged on
- Gross-up: whether variable costs are adjusted upward when the building is partly empty
- Heating and cooling equipment: who repairs it and who replaces it
- Audit rights: whether the tenant can check the landlord’s records, and by when
A CAM reconciliation review checks the annual bill against these clauses once the lease is running.
Questions before you sign
- What are the building’s actual operating costs for the last two years, per square foot?
- Which costs pass through, and which are excluded?
- Is there a base year or an expense stop, and what is it?
- Are increases in passed-through costs capped?
- Who replaces the roof, the parking lot and the heating and cooling equipment?
- How is the tenant’s share calculated, and what is the denominator?
- When does the annual reconciliation arrive, and how long is the review window?
A landlord with nothing to hide can answer the first question with a page of numbers. If the answer is a range or a shrug, price the uncertainty in. Drafting changes to the lease language is your attorney’s work.
Comparing offers fairly
To compare offers on different lease types, convert each one to an all-in cost per square foot for each year of the term, using the same cost and growth assumptions. Then look at two numbers: the total over the term and the worst plausible year. The lease with the lowest headline rent is rarely the whole answer.
The conversion also works in reverse. To compare a gross rent with a net one, subtract the costs the gross rent includes. In the example:
$23.50 gross, less $7.25 of building costs, less $1.25 of utilities = $15.00 net equivalent
Against the $15.50 triple net offer, the gross offer is $0.50 per square foot cheaper in year one, which matches the first-year costs above. The same subtraction works on any pair of offers, as long as the cost estimate is the building’s actual figure, not a guess.
Where each type shows up
There is no fixed rule, but patterns are worth knowing when you read listings:
- Strip centers and single-tenant retail are usually leased on net terms, with CAM, taxes and insurance passed through.
- Industrial and flex buildings are often net, sometimes with the tenant handling more of the building directly.
- Multi-tenant office is more often gross or modified gross, sometimes with a base year.
- Small owner-occupied buildings leased to a related business vary widely, and deserve a careful read when the building is sold.
A listing that does not say which type it is quoting is not finished. Ask before comparing it with anything else.
Our glossary of lease terms defines base year, expense stop, gross-up and the rest in a sentence each.
Read the lease, not the label
A lease abstract records exactly how your lease splits costs, with the section for each term, in 3 business days for up to 5 leases, from $275 per lease (indicative). For offers still on the table, our lease analysis service compares them on the same basis before you sign. Book a free 30-minute scoping call with the offers in hand.
