The Differences Between a Triple Net and Gross Lease
Do you understand the difference between these two common leases?
When leasing commercial office space, landlords typically offer either a Triple Net or Gross Lease. These lease structures determine how operating expenses are allocated and can significantly impact both the financial responsibilities and predictability of costs for tenants.
Triple Net (NNN) Lease
In a Triple Net Lease, the tenant is responsible for base rent plus their share of the property expenses. These typically include:
Property Taxes
Building Insurance
Common Area Maintenance (CAM)
Utilities, janitorial, maintenance, landscaping, pest control, management fees, etc.
Essentially, the tenant “nets” out these costs from the landlord’s responsibility, hence the term “triple net”. In office buildings with multiple tenants, these costs are usually apportioned based on the tenant’s pro-rata share of the total rentable square footage.
Expense Caps
Operating Expense Pass Through
To mitigate this risk, tenants often negotiate expense caps, especially on controllable expenses (all expenses except for real estate taxes, utilities, building insurance, snow and ice removal). These caps can be fixed (hard caps) or tied to inflation indices (soft caps), limiting the annual increases the landlord can pass through.
NNN leases involve operating expense pass-throughs, meaning all building expenses are passed directly to the tenant. This makes NNN leases less predictable.
Gross Lease
A Gross Lease, also known as a Full-Service Lease, includes base rent and all or most operating expenses (property taxes, insurance, and CAM), offering tenants a more predictable, all-in monthly rent, over the life of the lease.
Expense Caps in Gross Leases
In a gross lease, similar to NNN leases, expense caps can be negotiated, helping tenants control future cost increases from base-year escalations.
Gross Lease with Base Year
A gross lease with a base year is a full-service lease that allows for operating expense pass-throughs beyond a base year. For example, if property taxes increase after the first year, the tenant may pay their share of the difference. A modified gross lease can exclude expenses such as utilities and janitorial.
Key Takeaways
As a tenant, understanding these structures ensures informed negotiations and long-term financial planning.
Cherry Associates can help clients analyze all aspects of the lease decision process. If your firm is considering moving or renewing an existing lease, let Cherry Associates help guide you through the complex process.
