Gross, net, modified gross, full service — the lease type determines who pays what and who absorbs operating cost volatility. Understanding these structures before negotiating saves you from comparing options that look similar on a per-square-foot basis but are actually very different in total occupancy cost.
Full Service Gross Leases: Everything Included
In a full service gross lease, the quoted rent includes all operating expenses: property taxes, insurance, maintenance, management, janitorial service, and utilities (typically electric and HVAC). The tenant pays a single monthly rent with no additional charges except tenant-specific costs (phone, internet, specialized services). Full service gross leases offer the highest cost predictability — the landlord absorbs all operating cost volatility. This is the most tenant-favorable structure and is most common in Class A office buildings in major markets. The tradeoff: full service gross rents are higher than comparable NNN rents because the landlord prices operating cost risk into the base rent.
Modified Gross Leases: Some Costs Included, Some Passed Through
A modified gross lease includes most operating expenses in the base rent but excludes specific pass-throughs, typically: tenant electricity (tenant pays their own electric usage); operating expense escalations above a base year level (increases in taxes, insurance, and operating costs above the lease-execution-year baseline are passed through); parking (often additional); and sometimes janitorial services. Modified gross leases are the most common structure in suburban and secondary market office buildings. The rent appears to be all-inclusive, but additional charges accumulate over the lease term as expenses increase above the base year. Understand precisely what's included and excluded before comparing modified gross to full service or NNN options.
NNN Leases: Tenant Pays All Three Nets Plus Base Rent
Triple-net leases require tenants to pay base rent plus property taxes, building insurance, and all maintenance and operating costs. NNN leases are the norm in retail (strip centers, standalone buildings), industrial (warehouses, distribution centers), and some office markets. Base rents are lower than full service gross to reflect the tenant's responsibility for additional expenses. Understanding your total NNN cost requires requesting the landlord's historical operating expense data and calculating your pro-rata share. NNN leases with caps on controllable operating expenses and an explicit exclusion list convert an open-ended NNN obligation into a more predictable cost structure.
Single Net and Double Net: Less Common Variations
Single net (N) leases require tenants to pay only property taxes above the base rent, with the landlord retaining responsibility for insurance and maintenance. Double net (NN) leases require tenants to pay property taxes and insurance, with the landlord maintaining the property. These structures are less common than full NNN in contemporary commercial real estate but appear in older or smaller commercial properties. When you see 'net lease' without further specification, ask the landlord specifically which expenses are included in the net structure — the answer may surprise you and significantly affect your cost analysis.
Comparing Leases Across Structures: The Total Occupancy Cost Method
Comparing a $32/sq ft full service gross lease to a $22/sq ft NNN lease requires converting both to total occupancy cost. The NNN lease at $22/sq ft base likely adds $8–$12/sq ft in NNN charges, making the total $30–$34/sq ft — comparable to or higher than the full service gross. The modified gross lease at $28/sq ft that excludes electricity and escalations above base year may cost $30–$32/sq ft after adding those costs. Comparison requires: knowing the all-in NNN expenses from historical data; understanding what's included and excluded in modified gross; and modeling any escalation provisions to project year 3 and year 5 costs. Never compare leases on base rent alone.
Key Takeaways
- Full service gross includes everything — highest rent but highest predictability
- NNN leases add $8–$15/sq ft to quoted base rent — always calculate total occupancy cost
- Modified gross has 'surprise' pass-throughs — confirm exactly what's included and excluded before comparing
- Never compare commercial leases on base rent alone — convert all options to total occupancy cost
- Historical operating expense data from the landlord is essential for evaluating any NNN or modified gross lease
Frequently Asked Questions
- What is the 'effective rent' concept?
- Effective rent accounts for all costs and concessions over the lease term — base rent, operating expense pass-throughs, free rent periods, TI allowances, and other economic factors. Comparing effective rent across lease structures allows apples-to-apples comparison between a high-base FSG lease and a low-base NNN lease.
- Why do landlords prefer NNN leases?
- NNN leases shift the risk of rising operating costs to tenants. In an inflationary environment, a landlord on a FSG lease absorbs rising taxes, insurance, and maintenance costs out of fixed base rent. In an NNN lease, these costs pass through to tenants, protecting the landlord's net income.
- What is a 'base rent' vs. 'minimum rent' in retail leases?
- In retail leases with percentage rent, base rent (or minimum rent) is the fixed monthly rent amount. It represents the floor — you pay at least this amount regardless of sales. Above the breakpoint, you pay percentage rent (which must exceed the minimum rent calculation). Below the breakpoint, you pay only base/minimum rent.
- What is a 'gross lease with stops'?
- A gross lease with operating expense stops is a hybrid: the landlord pays all operating expenses up to the 'stop' amount (typically the first year's actual expenses), and increases above the stop pass through to tenants. This limits the landlord's expense risk while giving tenants the predictability of a mostly-gross structure.
- What type of lease is most common for small retail tenants?
- NNN leases are most common for small retail tenants in shopping centers and strip malls. FSG or modified gross are more common in multi-tenant office buildings. Industrial leases are almost always NNN. Single-tenant restaurants and service businesses often sign NNN leases.