NNN vs. gross vs. modified gross leases: what each one means
NNN, full-service gross and modified gross leases compared on one suite priced three ways, plus the clauses to check before you quote or sign.
“Gross,” “modified gross,” and “NNN” sound like three separate boxes, but they are points on one spectrum that answers a single question: who pays the building’s operating costs, and who carries the increases? This guide defines each lease type in plain terms, prices the same suite three ways so you can compare them fairly, and lists the clauses to check, because a label never overrides what the lease actually says.
01 / 08
The one question behind every lease type
A commercial tenant’s total cost is base rent plus a share of what it costs to run the building: property taxes, insurance, common area maintenance (CAM), and often utilities and janitorial. Lease types differ in two ways. First, which of those costs are already inside the rent. Second, what happens when those costs go up next year.
Everything below is a variation on those two choices. If you remember nothing else, remember that a lease type is shorthand and the operating expense clause is the contract.
02 / 08
Full-service gross: one rent, the landlord pays the building
In a full-service gross (FSG) lease the tenant pays a single rent and the landlord pays taxes, insurance, maintenance, and usually utilities and janitorial out of it. You will see this most often in multi-tenant office buildings.
The risk sits with the landlord: if costs rise, the rent does not, unless the lease says otherwise. That is why most full-service leases include a base year or an expense stop. The tenant pays its share of increases above the base year’s costs, so the landlord is protected from inflation but not from the first year’s costs.
Key points
- Tenant pays one rent, sometimes quoted as “gross” or “full service.”
- Landlord pays operating costs inside that rent.
- A base year or expense stop passes later increases to the tenant.
- Without a stop, the landlord absorbs increases until the rent changes.
03 / 08
Modified gross: a middle ground with no fixed definition
Modified gross is the least standardized term. It generally means the rent includes some operating costs but not all. Common patterns are a gross rent where the tenant pays its own utilities and janitorial, or a gross rent with a base year for increases in taxes and insurance, or a rent that covers the building but charges the tenant for suite-specific costs.
When someone says “modified gross,” ask one question: what exactly is excluded from the rent? The answer is the lease type. Do not assume that a modified gross lease in one market means the same thing as in another.
04 / 08
Net leases: single, double, and triple net
Net leases shift costs to the tenant one category at a time. A single net lease (N) has the tenant pay property taxes in addition to base rent. A double net lease (NN) adds insurance. A triple net lease (NNN) adds common area maintenance, so the tenant pays taxes, insurance, and its share of CAM.
An absolute or bondable NNN lease goes further and makes the tenant responsible for structural items such as the roof and foundation, which are usually the landlord’s in an ordinary NNN lease. Brokers do not always use “NN” and “NNN” consistently, so confirm which costs the tenant pays instead of relying on the number of Ns.
Key points
- N: taxes in addition to rent.
- NN: taxes and insurance.
- NNN: taxes, insurance, and CAM.
- Absolute NNN: also structural repairs and replacements.
05 / 08
The same suite priced three ways
Take a hypothetical 2,000-square-foot suite and price the first year three ways. The numbers are illustrative, not market data.
NNN: base rent of $18.00 per square foot plus reimbursements of $9.00 per square foot ($3.50 taxes, $1.00 insurance, $4.50 CAM) is $27.00 per square foot, or $54,000 a year ($4,500 a month).
Full-service gross: a flat $27.00 per square foot, $54,000 a year, with the landlord paying the operating costs.
Modified gross: $22.50 per square foot of rent, which covers taxes and insurance, plus CAM reimbursed by the tenant at $4.50 per square foot, again $27.00 per square foot and $54,000 a year.
All three cost the tenant the same in year one, which is the point: a lower headline rent on an NNN lease is not cheaper, it is just a smaller number before the reimbursements. The difference shows up next year. Suppose taxes, insurance, and CAM each rise 10 percent, which adds $0.90 per square foot in total. The NNN tenant pays $1,800 more, because every increase passes through in the reconciliation. The modified gross tenant pays only the CAM increase, $900. The full-service tenant with a base year pays its share of the increase, $1,800, and the full-service tenant with no stop pays nothing more while the landlord absorbs it until the rent changes.
06 / 08
Which lease type tends to fit which property
These are common patterns, not rules, and they vary by market and by building. Retail strip centers, shopping centers, and single-tenant buildings are most often NNN. Multi-tenant office is often full-service gross or modified gross with a base year. Medical office varies, commonly modified gross or NNN depending on the building’s build-out costs. Industrial space is often NNN or an industrial gross lease. Mixed-use buildings frequently mix lease types by space, so the lease type belongs on each tenant’s record, not the property’s.
07 / 08
What each type means for an owner’s paperwork
NNN leases create the most recurring work: monthly CAM estimates, an annual reconciliation, each tenant’s pro-rata share, and any caps or exclusions. The CAM reconciliation guide and the CAM caps guide cover that process step by step.
Gross leases with a base year need a different record: the base year’s actual costs and the tenant’s share, so each later year’s increase can be calculated. Modified gross leases need a clear list of which costs the tenant pays directly.
In every case the lease type should be recorded once, next to the clause that defines it. TenantPoint’s lease record captures the lease type along with the CAM method, share, caps, and notice dates, extracted from the signed lease for your approval, so the same terms drive rent and CAM instead of being retyped.
08 / 08
Check the clause, not the label
Before you quote, sign, or reconcile, read the operating expense clause and look for the items below. This is general information, not legal advice, and the signed lease controls.
Key points
- How operating expenses are defined, and which costs are excluded.
- Whether there is a base year or expense stop, and the base year’s amount.
- Whether controllable expenses are capped, and whether the cap is cumulative.
- Whether variable expenses are grossed up for vacancy.
- Whether an administrative fee applies and how it is calculated.
- How and when the reconciliation is delivered, and what audit rights the tenant has.
FAQ
Frequently asked questions
What is the difference between an NNN lease and a gross lease?
In an NNN lease the tenant pays base rent plus its share of property taxes, insurance, and common area maintenance, so the landlord’s costs pass through. In a gross lease the tenant pays one rent and the landlord pays those costs out of it. The costs exist either way; the lease type decides who carries them and who bears increases.
Is modified gross the same as full service?
Not quite. Full-service gross usually means the landlord pays all operating costs inside a single rent. Modified gross means some costs are excluded from the rent and charged to the tenant, but the lease defines which ones, so it varies. Always read what is excluded.
Who pays property taxes in a modified gross lease?
It depends on the lease. Often the landlord pays taxes inside the rent, with the tenant paying its share of increases above a base year, but some modified gross leases charge taxes or insurance separately. The operating expense clause answers it, not the label.
Is a base year lease the same as NNN?
No. A base year lease is a gross lease in which the tenant pays only its share of cost increases above the base year’s amount. An NNN lease has the tenant pay its share of all taxes, insurance, and CAM from the first dollar.
Which lease type is better for a small commercial landlord?
Neither is better on its own. NNN protects the landlord from rising costs but requires monthly estimates and an annual reconciliation. Gross leases are simpler to quote but leave the landlord exposed to increases unless there is a base year or stop. Many small owners use NNN for retail and a base year for office.
How do I compare quotes on different lease types?
Convert each to total occupancy cost per square foot for year one, including the reimbursements, utilities, and janitorial you will pay, then ask how increases are handled. The lowest base rent is not the lowest cost.
Free checklists
Get the lease abstraction and renewal checklists
The fields to pull from every lease, the renewal steps to calendar, and a rent roll template to keep the results in one place.
- Commercial Lease Abstraction ChecklistPrintable checklist
- Commercial Lease Renewal Checklist for LandlordsPrintable checklist
- Commercial rent roll templateSpreadsheet template
Put it into practice
TenantPoint handles this workflow in CAM reconciliation software and Commercial lease administration software. See all TenantPoint solutions or how it compares with other software.
This educational material is not legal, accounting, tax, or investment advice. Review controlling lease language and consult qualified professionals when appropriate.
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