In commercial real estate, a lease defines the relationship between a property owner and a tenant. It’s a contractual agreement that outlines the rights and responsibilities of each party.
However, not all leases are the same. As a result, it’s important for CRE owners and commercial tenants to understand the differences between various lease types.
Understanding lease types
CRE leases come in many forms, and the type you use can affect your financial obligations, how much control you have over the property, and your investment risk level.
That said, the two most common types of commercial real estate leases are triple net leases and gross leases.
What is a triple net (NNN) lease?
A triple net lease (NNN) is a lease in which the tenant pays a base rent on top of three “nets”: property taxes, insurance, and maintenance costs. In other words, it transfers the financial responsibility and risk of these three major operating costs from the owner to the tenant.
What is a gross lease?
A gross lease is a lease in which the tenant pays a fixed rent, while the owner covers all operating expenses, including property taxes, insurance, and maintenance costs. This is the simplest type of commercial lease but also comes with more cost variability for the owner.
Triple net lease vs. gross lease: Key differences
Let’s take a closer look at the key differences between triple net leases and gross leases:
Cost distribution
Triple net leases pass tax, insurance, and maintenance costs onto the tenant, while gross leases have the property owner assume these operating costs.
Of course, the difference in cost distribution is also reflected in the rent. A triple net lease property tends to charge lower rent than an equivalent gross lease, for example.
Maintenance and operational responsibilities
Under a gross lease, the CRE owner is responsible for all maintenance and operational duties.
By contrast, triple net leases make the tenant responsible for property taxes, insurance, and maintenance costs, including their share of common area maintenance (CAM) costs, which are typically allocated proportionally among tenants based on their leased square footage.
Financial predictability
Your lease structure also impacts how predictable your property income and expenses are.
For example, a triple net lease provides predictable income for the property owner, since the tenant covers most variable operating expenses (taxes, insurance, and maintenance). Conversely, a gross lease offers predictable costs for the tenant, but leaves the property owner responsible for variable operating expenses.
Property management involvement
Triple net leases and gross leases require different levels of property management.
On the one hand, triple net leases require minimal effort from property owners. It’s the most passive approach to commercial leases because you’re not responsible for regular maintenance. On the other hand, gross leases require the most involvement since you are responsible for regular maintenance.
Investment perspective
From an investment perspective, triple net leases offer consistent but generally lower returns. Meanwhile, gross leases offer potentially higher returns but at a higher risk since operating costs could rise and eat into your profit margins.
How does each lease type work?
Now that you understand how triple net leases and gross leases differ, here’s how each works:
Triple net lease structure
Triple net leases make tenants responsible for property tax, insurance, and maintenance costs. Here’s an example of a multi-tenant building’s cost breakdown:
Responsibilities of the tenant and landlord in a triple net lease
| Tenant Responsibilities | |||||
| Rent | Property Tax (pro rata) | Insurance (pro rata) | Maintenance costs (pro rata) | Total Paid by Tenant | |
| Tenant 1 | $5,000 | $250 | $750 | $1,250 | $7,250 |
| Tenant 2 | $10,000 | $500 | $1,500 | $2,500 | $14,500 |
| Tenant 3 | $7,000 | $350 | $1,050 | $1,750 | $8,400 |
Meanwhile, the property owner is only responsible for limited operating costs, such as major upgrades or improvements, structural repairs, and administrative costs.
Gross lease structure
Gross leases make the property owner responsible for property tax, insurance, and maintenance costs. Here’s an example of a multi-tenant building’s cost breakdown:
Responsibilities of the tenant and landlord in a gross lease
| Tenant Responsibilities | ||
| Rent | Total Paid by Tenant | |
| Tenant 1 | $7,250 | $7,250 |
| Tenant 2 | $14,500 | $14,500 |
| Tenant 3 | $10,150 | $10,150 |
Meanwhile, the property owner is responsible for the following:
| Owner Responsibilities | |||
| Property Tax | Insurance | Maintenance costs | Total Paid by Owner |
| $1,100 | $3,300 | $5,500 | $9,900 |
No matter the lease type, the total cost of operating a commercial building remains roughly the same. The lease type simply determines who is responsible for the operating costs.
Pros and cons of a triple net lease
Before opting for a triple net lease (NNN) as an owner, consider the pros and cons:
Pros
| Lower property management burden | Leave routine maintenance to your tenants so you have fewer operational responsibilities. |
| Predictable cash flow | With less responsibility for operational costs, your cash flow will be steadier. |
| Long-term tenancy potential | NNN leases often attract stable tenants who prefer long-term lease commitments. |
Cons
| Limited upside potential | It’s hard to capitalize on rising rents when locked into a long-term NNN lease. |
| Higher vacancy costs | If a tenant leaves, you’re suddenly responsible for all property expenses. |
| Less control over property maintenance | You have less visibility and influence over how the property is maintained. |
Pros and cons of a gross lease
Here are the pros and cons of a gross lease for CRE owners:
Pros
| Higher rent potential | To offset the cost of covering all operating expenses, you can charge higher rent. |
| More control over property maintenance | Keep your property in good condition and preserve its value by controlling maintenance. |
| Attract more tenants | The simplified payment structure of gross leases can attract more tenants. |
Cons
| Risk of rising operating costs | You absorb any increases in property taxes, insurance, and maintenance costs. |
| Less predictable cash flow | Since operating costs vary, your cash flow may be inconsistent, complicating budgeting. |
| More management responsibility | You’re responsible for overseeing maintenance, vendors, and other operations. |
Use cases of triple net and gross leases
Triple net leases and gross leases both have their place in the CRE industry. Here are the most common use cases for each:
Triple net lease
- Long-term commercial properties for national retailers or pharmacies often have triple net leases to create a stable income for investors.
- Passive real estate investors often seek out triple net leases for their steady income and minimal management requirements.
- Retail and industrial tenants tend to prefer triple net leases so they can have full control over operations—especially if they have low profit margins.
Gross lease
- Small office spaces tend to share utilities and services with other tenants, making a gross lease more practical than splitting operating costs.
- Short-term leases are often structured as gross leases to simplify maintenance responsibilities and reduce the disruption caused by frequent tenant turnover.
- Startups or budget-conscious tenants may prefer predictable monthly expenses and the operational simplicity of a gross lease.
Factors to consider when choosing between triple net lease and gross lease
If you’re still unsure which lease type is best for a particular property, weigh the following factors:
| Tenant type and business model | If you’re leasing to a stable tenant with strong credit and a proven business model, it’s easier to trust them with property maintenance and sign a triple net lease. Conversely, if it’s a new business without a track record, you may want to maintain control with a gross lease. For multi-tenant buildings, check your current stacking plan to ensure you have a good mix of leases. |
| Desired level of property control | How much control over maintenance and operations do you prefer? If you’re the type to worry about building operations or want to keep a close eye on it, sign a gross lease. However, if you prefer a passive investment and like outsourcing, a triple net lease may be a better option. |
| Cash flow and risk tolerance | As an investor, there’s always a tradeoff between risk and reward. Gross leases come with higher potential returns and more risk, while triple net leases come with lower potential rewards but less risk. Leverage risk management strategies to find the right balance. |
| Market conditions and property type | Sometimes the market or property type dictates the lease type. For example, suburban retail buildings often use triple net leases, while urban offices use gross leases. Study your local market and property type to find the most suitable lease. |
Legal considerations in lease agreements
Before signing a commercial real estate lease agreement, carefully review the following:
- Lease duration and renewal clauses. Understand when the lease term will expire and what the process is for renewing it. Look for any automatic renewal provisions or deadlines for providing notice.
- Maintenance obligations and insurance. Clarify who is responsible for maintaining different parts of the property (e.g., structural, mechanical, and cosmetic components) and ensure the building has appropriate insurance. In a triple net lease, the tenant is responsible for property insurance.
- Handling defaults and disputes. Review the process for dealing with late payments, lease violations, or other contract breaches. Check whether disputes must go through arbitration, mediation, or litigation.
- Local commercial real estate regulations: Familiarize yourself with local commercial real estate laws to ensure the lease complies with zoning laws, occupancy requirements, building codes, and property tax regulations.
Conclusion
Ultimately, the right choice between a triple net lease and a gross lease depends on your investment goals, risk tolerance, and management preferences. Now that you understand the benefits and tradeoffs of each type of commercial real estate lease, you can make better leasing decisions that align with your long-term investment strategy.
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