Commercial Lease Structures: Gross vs. Net Lease Basics

Commercial lease structures determine how operating expenses are split between landlord and tenant. A gross lease has the landlord pay most expenses, while a net lease shifts some or all of them to the tenant.

Every commercial lease answers one core question: who pays the property's operating expenses, the landlord or the tenant. The answer changes the effective cost of the space, and it directly affects the NOI math covered earlier in this series.

The Core Question: Who Pays Operating Expenses

Every commercial lease specifies rent, but rent alone doesn't tell you the full cost of occupying a space, or the full income a landlord actually collects. What matters just as much is who's responsible for the building's operating expenses: property taxes, insurance, and maintenance.

Two properties can quote the exact same rent per square foot and still produce very different numbers once you know who's paying for what.

This is the simplest structure from a tenant's perspective, one bill, no surprises. It's common in multi-tenant office buildings and some smaller commercial spaces. For a landlord, a gross lease means operating expenses come directly out of the rent collected, so the rent has to be priced high enough to cover those costs and still leave a profit.

There's no single standard version. One modified gross lease might have the tenant covering utilities and janitorial while the landlord covers taxes and insurance. Another might have the tenant paying only base rent in year one, then picking up a share of expense increases in later years. The details vary lease to lease, which is exactly why the specific terms matter more than the label.

Exactly what falls under "maintenance" and how it's split can vary from lease to lease, so the label describes a category of structure, not an identical set of terms every time. This is essentially the opposite of a gross lease, most of the operating expense burden shifts to the tenant.

NNN shows up frequently in single-tenant retail (freestanding buildings, pad sites) and industrial real estate, particularly on longer-term leases. Multi-tenant retail, like shopping centers and malls, uses a wider mix of structures, since inline tenants often negotiate different terms than a single anchor or freestanding user. Lease structure in retail varies substantially by asset type and tenant, so check the actual lease rather than assuming NNN based on property type alone. Base rent under a NNN lease is often lower than a comparable gross lease, since the tenant has taken on the expense risk that the landlord would otherwise be pricing into the rent.

Two lighter variants exist between gross and triple net. A single net lease has the tenant paying property taxes only, with the landlord covering insurance and maintenance. A double net lease has the tenant paying taxes and insurance, with the landlord covering maintenance. Both are less common than gross, modified gross, or full triple net, and the full mechanics of expense reconciliation under any net lease (common area maintenance charges, expense stops, and how landlords calculate a tenant's proportionate share) go well beyond 101 scope, that's a deeper topic for another time.

A Note on Percentage Rent

One more structure to know by name: a percentage lease, common in retail, has the tenant paying a base rent plus a percentage of their sales above an agreed threshold. It's a way of tying the landlord's income to the tenant's performance, and it shows up often in shopping centers and malls. The mechanics of how a percentage rent breakpoint actually gets calculated are specific enough that they deserve their own treatment elsewhere, not covered in depth here.

Why Lease Type Matters for Underwriting

Lease type isn't a minor detail buried in the fine print, it directly shapes your NOI. The same quoted rent produces a very different effective income depending on who's paying operating expenses. A property with NNN leases in place will show a cleaner, more predictable NOI, since expense risk sits with the tenant. A property with gross leases requires more careful expense assumptions, since the landlord is absorbing whatever those costs turn out to be.

When you're underwriting a deal, checking the actual lease structure, not just the quoted rent, is a required step, not an optional one.

Common Mistakes

• Assuming every lease in a property type follows the same structure. Not every retail lease is NNN, and not every office lease is gross, check the actual lease.
• Comparing rents across properties without checking lease type. A higher quoted rent on a gross lease might still be cheaper overall than a lower quoted rent on a NNN lease, once expenses are factored in.
• Treating "NNN" as shorthand for zero landlord responsibility. Most NNN leases still leave base building structural repairs with the landlord, the tenant isn't necessarily covering everything.

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