Understanding Commercial Leases: Gross, Modified Gross, and NNN
The quoted rate on a commercial listing means nothing until you know the lease type. Twenty dollars per square foot full service and twenty dollars triple net are very different deals, and the difference shows up in your operating costs every month. This guide covers the three main commercial lease types, the expenses that ride along with base rent, and the terms worth negotiating before you sign.
The Three Main Commercial Lease Types
Almost every commercial lease is a variation on three structures. The names tell you who pays the building’s operating expenses: the landlord, the tenant, or both.
Gross (Full Service) Lease
You pay one rent number and the landlord covers operating expenses: property taxes, insurance, maintenance, and usually utilities and janitorial. Most office leases work this way. Watch the base year clause, which passes expense increases through to you once the building’s costs rise above your first year’s level.
Modified Gross Lease
The middle ground. Landlord and tenant split the expense categories, and the split is negotiable, so one modified gross lease can look nothing like another. The label tells you less than the expense language in the actual document, which is where your review should focus.
Triple Net (NNN) Lease
You pay a lower base rent plus your share of the three nets: property taxes, insurance, and common area maintenance. Most retail and industrial leases are NNN. The base rent looks cheap until you add the pass-throughs, so always ask for the current expense estimate before comparing spaces.
What You Pay Beyond Base Rent
Under NNN and modified gross leases, these costs ride along with rent. Together they can add several dollars per square foot per year.
Property Taxes and Insurance
Your pro-rata share of the building’s tax bill and insurance premiums. If the property sells and gets reassessed, your share can jump. Ask how taxes are handled on a sale before you sign.
Common Area Maintenance (CAM)
Parking lot upkeep, landscaping, lighting, trash, security, and often a management fee. Landlords bill estimates monthly and reconcile after year end. Read the reconciliation; errors are rarely in the tenant’s favor.
Utilities and Janitorial
Depending on the lease, these are included, separately metered, or billed back. Confirm which before comparing quotes, because a full service rate with janitorial included beats a similar rate without it.
Annual Escalations
Base rent rarely stays flat. Most leases raise it a fixed percentage each year. Over a ten year term, the escalation rate moves your total cost as much as the starting rent does, so negotiate both.
Lease Terms Worth Negotiating
The rate gets the attention. These terms decide what the lease actually costs and how much flexibility you keep.
Tenant Improvement (TI) Allowance
Money the landlord contributes toward building out your space, quoted per square foot. Longer terms earn bigger allowances. Get contractor pricing before you sign, because an allowance that sounds generous can cover half of what your buildout really costs.
Free Rent
Months of abated rent at the start of the term, common on longer leases and spaces that need work. Free rent lowers your effective rate without lowering the face rate, so landlords often concede it faster than a price cut.
Renewal Options
The right to extend at a set rate or a defined market rate. Options cost nothing today and keep you from starting over in five years with no leverage. Mind the notice deadlines: miss the window and the option dies.
Expense Caps and Audit Rights
A cap limits how fast controllable operating expenses can grow, and audit rights let you review the landlord’s books. Neither exists unless you negotiate it into the lease before signing.
Assignment and Subletting
Your exit paths if the business outgrows the space or shrinks. Push for the right to assign or sublet with reasonable landlord consent. Without it, you carry every square foot for the full term no matter what happens.
Why Work with Randy Suh on Your Lease
Landlords negotiate leases every week. Most tenants do it once every five years, against a document the landlord’s attorney wrote.
Here is what Randy brings to a lease negotiation:
- Market comps: what tenants actually paid in comparable Atlanta buildings, not the asking rates.
- Full market surveys: listed space, subleases, and space that has not hit the market yet.
- LOI and lease negotiation: the economics and the fine print, worked alongside your attorney.
- Landlord-paid fee: in most deals the landlord pays the tenant rep’s commission, so representation costs you nothing out of pocket.
- Both sides of the table: Randy also represents landlords, so he knows exactly how the other side prices a deal.
Already in a lease? Randy also handles renewals, expansions, and subleases, where the same terms get renegotiated with better leverage than most tenants realize they have.
Reviewing a Lease Right Now?
Send it over before you sign. A second set of eyes on the expense language, escalations, and options costs nothing, and it routinely finds money. If your lease expires within the next 12 months, now is the right time to start, not 60 days out.
Contact Randy today to get started. Reach him directly at Randy@BullRealty.com or call 404-876-1640 x143.
Randy Suh 