Understanding Triple Net, Gross, and Modified Gross Leases | David Emory Fleet

When leasing commercial real estate, tenants and landlords have various lease options with different features and cost structures, three common types of lease agreements in commercial real estate are triple net, gross, and modified gross leases. Understanding the differences between these leases is vital for tenants and landlords. Here’s a closer look at each type of lease.

Triple Net Lease

A triple net lease refers to a tenant being responsible for paying all operating expenses related to the property, including property taxes, insurance, and maintenance. The triple net lease is typically used for freestanding buildings or single-tenant properties. The tenant pays a base rent plus their share of operating expenses, which are usually calculated on a pro-rata basis based on the square footage of the leased space. Triple net leases provide the landlord with a predictable income stream and shift the responsibility for operating expenses to the tenant.

Gross Lease

With a gross lease, the landlord is responsible for paying all operating expenses related to the property, including property taxes, insurance, and maintenance. The tenant pays a fixed rent amount that includes all operational costs. Gross leases are commonly used for multi-tenant buildings, such as office buildings or shopping centers. Gross leases provide tenants with a predictable rent amount and eliminate the need to budget for operating expenses.

Modified Gross Lease

A modified gross lease is a hybrid of the triple net and gross lease structures. In a modified gross lease, the tenant and landlord share the responsibility for operating expenses. The lease agreement specifies which costs are the responsibility of each party. For example, the landlord may be responsible for property taxes and insurance, while the tenant is responsible for maintenance and utilities. The tenant pays a base rent amount plus their share of operating expenses. Modified gross leases provide flexibility for both tenants and landlords, as they can negotiate which expenses are the responsibility of each party.

Choosing the Right Lease

When choosing a lease structure, tenants and landlords should consider their goals and priorities. Triple net leases may be a good option for tenants who want more control over operating expenses and are willing to bear the risk of fluctuating costs. Gross leases may be a good option for tenants who wish to have a predictable rent amount and don’t want to worry about budgeting for operating expenses. Modified gross leases may be a good option for tenants who wish to negotiate the responsibility for operating expenses and want more flexibility in their lease structure.

For landlords, triple net leases provide a predictable income stream and shift the risk of operating expenses to the tenant. In contrast, gross leases offer a more straightforward lease structure and eliminate the need to budget for operating costs. Modified gross leases provide flexibility in negotiating the responsibility for operating expenses and can be tailored to meet the tenant and landlord’s needs.

Understanding the differences between triple net, gross, and modified gross leases is essential for tenants and landlords in commercial real estate. Each type of lease has its own features and cost structure, and the proper lease structure depends on the goals and priorities of both parties. By understanding these lease options, tenants and landlords can make informed decisions and negotiate lease terms that meet their needs.

Article originally published on davidemoryfleet.net.