Gross, Modified Gross and Triple Net Leases Explained

Whatever the lease is called, a commercial building has the same set of running costs. Someone has to pay for each of them, and the lease structure is simply the rule for dividing them between landlord and tenant.

• Real estate taxes on the property.
• Property insurance carried by the owner on the building.
• Common area maintenance and operating expenses: cleaning and repair of shared areas, management, security, landscaping, snow removal, and upkeep of building systems.
• Utilities: electricity, gas, water and sewer, for both common areas and tenant spaces.
• Janitorial service inside the tenant's own premises.
• Repairs and maintenance inside the premises and of the equipment serving it.

The first three are the three nets. A lease is described by how many of them the tenant pays on top of base rent. The remaining items are handled separately in each lease and are where two leases with the same label often differ.

In a gross lease the tenant pays a single rent figure and the landlord pays the building's taxes, insurance and operating expenses from it. In office buildings the fullest version is called a full-service gross lease, which typically also includes utilities and janitorial service for the tenant's suite.

The appeal is simplicity. You know what you will pay each month, and the landlord, not you, absorbs a bad year for property taxes or snow removal. The trade-off is that the landlord prices that risk into the rent.

A pure gross lease with no adjustment for rising costs is uncommon over a multi-year term. In practice most office leases described as gross or full service include a base year or expense stop, which makes them a form of modified gross lease.

Modified gross is a broad label for anything between fully gross and fully net. The most common office version works through a base year.

The base year is a reference year, usually the calendar year in which the lease begins. The landlord's actual operating expenses and taxes for that year set a baseline, and the rent you pay is treated as covering costs up to that level. In each later year, you pay your proportionate share of any increase above the baseline. If costs do not rise, you pay nothing extra. A similar device, the expense stop, fixes the baseline as a stated amount instead of a year's actual costs.

• The choice of base year matters. A later base year generally means a higher baseline and smaller pass-throughs to you.
• A base year in which the building was partly empty can understate normal costs. A gross-up clause adjusts variable expenses to what they would have been at fuller occupancy, and it should apply consistently to the base year and later years.
• Taxes may have a separate base year from operating expenses.
• A reassessment after a building sale or major renovation can lift taxes well above the base. Ask how the lease treats that.

Modified gross can also describe other splits, for example a lease where the rent includes taxes and insurance but the tenant pays its own electricity and cleaning. This is why the label alone tells you little.

In a net lease the tenant pays a base rent that excludes some or all of the building's costs, then pays those costs separately as additional rent.

• Single net: the tenant pays base rent plus its share of real estate taxes.
• Double net: base rent plus taxes and property insurance.
• Triple net, written NNN: base rent plus taxes, insurance and common area maintenance or operating expenses.
• Absolute net: a stricter form in which the tenant takes on essentially all costs and risks of the property, including structural items. It is mostly seen with single-tenant buildings on long terms.

In a triple net lease the landlord estimates the year's taxes, insurance and maintenance, bills the tenant monthly with the rent, and reconciles against actual costs after year end. You then receive a credit or a bill for the difference.

The quoted base rent in a net lease looks lower than a gross rent for comparable space, because it leaves out the pass-throughs. The tenant also carries the risk of every increase from the first dollar, not only increases above a baseline.

Conventions differ by property type and by market, so treat the following as tendencies to verify, not rules.

• Multi-tenant office buildings, particularly downtown towers, are commonly leased on a full-service or modified gross basis with a base year. Some markets and some suburban buildings quote office space on a net basis instead, sometimes with tenant electricity billed separately.
• Industrial, flex and R&D buildings are commonly leased on a net basis, often triple net, with the tenant also paying its own utilities directly and maintaining more of its own premises.
• Retail space is commonly leased net as well.
• Single-tenant buildings of any type lean toward net structures, because one occupant uses the whole property.

For an AI or technology company, this matters most when comparing unlike options. A hardware team weighing a downtown office against a flex building will probably see one quote on a gross basis and the other on a net basis. Neither can be judged until both are converted to total cost.

1. For each option, ask in writing exactly which costs are included in the quoted rent and which are billed separately.
2. For net quotes, ask for the current estimate of taxes, insurance and operating expenses per rentable square foot, and for several years of history.
3. For base year quotes, ask what the base year will be and how expenses have moved over recent years.
4. Add separately metered or billed utilities and in-suite janitorial where they are not included.
5. Total the first-year cost for each option on the same basis, then project it across the term using the rent increases and a reasonable assumption for cost growth.
6. Compare how much of the risk of rising costs sits with you in each case, and what protections are offered.

The protections are negotiable under any structure. Caps on annual increases in controllable expenses, exclusions for costs that should not be passed through, such as major capital projects, and a right to audit the landlord's figures all limit your exposure. Our guides on operating expenses and on expense caps and audit rights cover those in detail.

• ✓Which of taxes, insurance and operating expenses are included in the quoted rent?
• ✓If there is a base year, which year, and is it grossed up for occupancy?
• ✓Who pays for electricity, and is it metered or estimated?
• ✓Is cleaning of our suite included?
• ✓Who repairs and replaces the heating and cooling equipment serving our space?
• ✓Are increases capped, and can we audit the charges?

When TAG compares proposals for a client, we restate every option as total occupancy cost, so that a gross quote and a net quote can be read side by side. Have your attorney review how the lease defines each cost category, since the definitions decide what you are billed.