NNN vs gross lease: what each structure actually costs a tenant

A space quoted at $28.00 triple net and a space quoted at $37.00 full service can cost the tenant the same amount. They can also differ by six dollars a foot in either direction. The quoted rate tells you almost nothing until you know what the structure includes and what the estimated costs actually are.

The three structures

Triple net (NNN). Base rent plus the tenant's proportionate share of three cost categories: property taxes, building insurance, and common area maintenance. Standard in retail and industrial. The landlord's rent is net of those three, which is where the name comes from. See triple net lease.

Full service gross. One number covering rent and all operating costs. Almost always paired with a base year, so the tenant pays its share of increases above the base year level starting in year two. Standard in multi tenant office.

Modified gross. Anything in between, and the label is not standardized. Commonly the landlord covers taxes and insurance while the tenant pays utilities and janitorial for its own suite. Because the term means different things in different markets, read the lease rather than the label.

Comparing offers across structures

The only honest comparison is a total effective cost per rentable square foot per year, built the same way for every option.

For a triple net offer, add base rent plus the estimated nets. A space at $28.00 NNN with estimated nets of $9.50 is $37.50 all in for year one. For a full service offer, the quoted rate is year one all in, and the escalation exposure starts in year two.

Then extend both across the full term, because the structures escalate differently:

• Triple net base rent typically escalates by a fixed percentage, often 3 percent, while the nets float with actual costs
• Full service rent escalates by a fixed percentage on the whole number, and the tenant separately pays its share of operating cost increases over base

Over a ten year term those produce meaningfully different curves. A triple net deal with no expense cap has genuinely open ended exposure in the nets. A full service deal with a well set base year has more of its escalation locked into a known percentage.

Also add the load factor. A 10,000 usable foot requirement is 11,500 rentable feet at a 15 percent load and 12,000 at a 20 percent load. Comparing rates per rentable foot across buildings with different load factors compares two different quantities.

What to check in a triple net deal

Everything in the nets is defined by the lease, and the definitions are where the money moves.

• Capital expenditures. A roof replacement has a twenty year life. If the lease permits the landlord to expense it in the year spent, one item can double a small tenant's annual nets. Push for amortization over useful life at a stated rate.
• Management fees. Typically 3 to 5 percent. Confirm the fee is calculated on base rent, not on base rent plus recoveries, because the second version charges a fee on your own CAM payment.
• Pro rata share denominator. Rentable area in the property, not leased area. At 70 percent occupancy the difference is roughly a 43 percent increase in every tenant's share.
• The exclusions list. Leasing commissions, executive salaries, costs of leasing space to new tenants, and costs benefiting a single tenant belong outside recoverable CAM. This list shrinks in landlord redlines.
• A cap on controllable expenses, non cumulative, in the 4 to 6 percent range.
• Audit rights with a workable window and cost shifting if the overstatement exceeds a threshold.

What to check in a full service deal

The base year does most of the work, and it fails in two ways.

A partial base year. A lease commencing in September with the base year set to that calendar year captures four months of costs. Insist on the first full calendar year.

An artificially low base year. A building 55 percent occupied during the base year had genuinely lower variable costs. When it fills, the tenant pays escalations it did not cause. The fix is a gross-up provision applied to variable expenses in both the base year and every comparison year. Tenants often treat gross up as a landlord device and negotiate against it, which in a base year lease is backwards.

Also check whether taxes have a separate base year, and whether increases from a reassessment on a change of ownership are excluded. In some states that single item is the largest expense change a tenant will see.

Which structure is better for a tenant

Neither, inherently. The structure determines where the risk sits, not how much there is.

Triple net gives the tenant visibility into actual costs and, with a cap and real audit rights, reasonable control. It also gives the tenant the volatility. Full service transfers volatility to the landlord and the landlord prices that transfer into the rent, which is fine, and pairs it with a base year mechanism that can quietly claw the risk back if the base year is set badly.

A tenant with a long term and limited appetite for surprises should push hardest on the cap in a triple net deal and hardest on the base year definition in a full service deal. Those are the same negotiation wearing different clothes.

Get the structure into the LOI

All of this is far easier to settle before a lease is drafted. A letter of intent that names the structure, the estimated nets or base year, the cap and its cumulative status, and the pro rata share denominator gives you a reference point for every later round. Without it, the first draft sets the terms and you are arguing uphill.

Once drafting starts, the operating expense articles are long and procedural, which makes them a comfortable place for changes to hide. Read the definitions article and the exclusions list in every round, not just the rent article. Our redline reading method covers the sequence.