Angel Campa, FounderCommercial lease types are not just naming conventions — they define who pays for what, who bears the risk of cost increases, and what your actual monthly payment will be three years into the lease versus what it is on day one. Choosing a space without understanding its lease structure is the equivalent of agreeing to a mortgage without understanding whether the rate is fixed or variable.
The five main commercial lease structures — triple net, gross, modified gross, percentage, and ground — allocate operating expense obligations differently. Each has a different risk/reward profile for both landlords and tenants, and each is dominant in specific property types and market contexts.
Overview: Commercial Lease Types at a Glance
| Lease Type | Who Pays Operating Expenses | Typical Use Cases | Typical Term |
|---|---|---|---|
| Triple Net (NNN) | Tenant pays taxes, insurance, and maintenance | Single-tenant retail, industrial, net lease | 10–25 years |
| Gross | Landlord covers all operating expenses | Smaller office, some service retail | 1–5 years |
| Modified Gross | Split: tenant pays some, landlord pays others | Multi-tenant office, flex space | 3–7 years |
| Percentage | Base rent + % of gross sales | Shopping centers, food service retail | 5–10 years |
| Ground | Tenant leases land only, builds and maintains | Development sites, fast food, institutional | 30–99 years |
Triple Net Lease (NNN)
In a triple net lease, the tenant pays base rent plus three categories of property operating expenses: real estate taxes, building insurance premiums, and maintenance and repairs (commonly called CAM — common area maintenance). The "triple" refers to these three net expense categories, each of which passes through to the tenant in addition to base rent.
Because the landlord receives base rent with minimal operating expense exposure, NNN leases produce near-passive income and are the preferred structure for institutional net lease investors — publicly traded REITs, insurance companies, and pension funds that invest in commercial real estate for stable, long-duration cash flows. The credit quality of the tenant matters more than the property in a NNN lease: a CVS or McDonald's NNN lease is essentially a corporate bond backed by real estate.
How NNN expenses work in practice. The landlord estimates property taxes, insurance, and CAM at the start of each year. Tenants pay these estimates monthly as separate line items. After year-end, the landlord reconciles actual expenses against estimates — the tenant pays a true-up if actuals exceeded estimates, or receives a credit if actuals were lower. The annual reconciliation statement is the document where most CAM disputes originate.
What NNN tenants must negotiate. Without protections, NNN leases expose tenants to unlimited operating expense growth. Essential NNN protections include: (1) a controllable expense cap — typically 3–5% annually on management-controllable expenses; (2) capital expenditure exclusions — roof, HVAC, and structural replacements are ownership costs, not operating expenses; (3) audit rights — the right to examine expense records to verify the reconciliation; and (4) a management fee cap stated as a percentage of revenues.
Typical NNN base rent discount. NNN leases carry lower base rents than gross leases for the same property. If comparable gross lease space commands $30/SF annually, an equivalent NNN space might be priced at $18–$22/SF, with the $8–$12 difference representing the expected annual NNN expense passthrough. When evaluating competing proposals of different lease types, always convert to total occupancy cost per square foot before comparing.
For a detailed NNN analysis, see triple net lease guide.
Gross Lease
A gross lease (also called a full-service lease) is the opposite of NNN: the tenant pays a single all-inclusive rent and the landlord covers all operating expenses — taxes, insurance, utilities, janitorial, maintenance, and management — out of that rent payment. The tenant writes one check; the landlord handles everything else.
Gross leases are common in smaller office buildings where the landlord manages utilities and building systems centrally and where individual tenant submetering is impractical. They are also found in some service retail and flex industrial contexts. Multi-tenant Class A office buildings rarely use pure gross leases; they typically use modified gross or base year structures.
The landlord's risk. In a gross lease, the landlord absorbs all operating expense variability. If property taxes increase 15% or insurance premiums spike after a natural disaster, the landlord's net income drops. This risk is why gross leases carry higher base rents than NNN leases — the premium over NNN reflects the landlord's cost of absorbing expense variability.
The tenant's advantage. Predictable monthly cost. The tenant's budget exposure is the base rent escalation (usually fixed steps of 2–3% annually or CPI-tied) and nothing else. For small businesses that cannot afford a finance team to manage operating expense reconciliations, the simplicity of gross leases has real operational value.
Watch for modified gross in disguise. Many leases labeled "gross" include provisions requiring tenants to pay their share of operating expense increases above a base year level. Read the operating expense provisions, not just the lease type label.
Modified Gross Lease
A modified gross lease splits operating expenses between landlord and tenant in a way that is individually negotiated rather than following a fixed formula. The tenant pays base rent that includes some expense categories (commonly property taxes and insurance), while other expenses pass through separately (commonly utilities metered to the tenant's space and janitorial).
Modified gross leases are the dominant structure in multi-tenant office buildings. In a typical Class A office modified gross lease:
- Landlord covers: structural maintenance, exterior, common area cleaning, HVAC for common areas, property taxes, building insurance
- Tenant pays: base rent (which bundles in the landlord's covered costs), electricity and HVAC within the tenant's space (metered or sub-metered), janitorial within the tenant's space
Base year gross leases. A common variant establishes a base year — typically the first year of the lease — as the expense baseline. The landlord covers all operating expenses up to the base year level. Any increases above the base year pass through to the tenant as "expense stop overages." This hybrid structure gives tenants gross-lease predictability for expense levels they already know, while passing through only the growth above that level.
Expense stop leases. Another variant specifies a fixed per-square-foot expense stop. The landlord covers the first $X/SF of operating expenses; the tenant pays everything above. This is a simple, transparent structure that avoids the complexity of base year calculations.
The key negotiation in a modified gross lease is defining which expense categories are included in the "modified" portion — specifically what the landlord covers versus what passes through to the tenant — and what caps or limits apply to the passthrough categories.
Percentage Lease
A percentage lease is used primarily in retail — particularly in enclosed shopping malls, power centers, and food service real estate. The tenant pays a base rent plus a percentage of gross sales above a defined breakpoint. The percentage rate typically ranges from 1.5% to 8% depending on the retail category.
Natural breakpoint. The natural breakpoint is the sales volume at which the percentage rent kicks in. It is calculated by dividing annual base rent by the percentage rate. A tenant paying $100,000 in annual base rent at a 5% rate has a natural breakpoint of $2,000,000: if annual sales exceed $2,000,000, the tenant pays 5% of the excess above $2,000,000 in percentage rent.
Who pays expenses. Percentage leases are typically structured as NNN or modified gross for the operating expense side, with the percentage rent as an additional layer. The expense structure and the percentage rent structure are negotiated separately.
Why percentage leases exist. Mall landlords have historically used percentage leases because their properties' success is tied to the performance of individual tenants. A struggling anchor tenant reduces mall traffic, which hurts all other tenants, which reduces the landlord's overall rent roll. Percentage leases align the landlord's income with tenant performance and give the landlord a tool to manage tenant mix: weaker performers pay less absolute rent, stronger performers pay more.
The decline of percentage leases. E-commerce has fundamentally challenged the percentage lease model. Retail tenants with omnichannel sales operations argue that online sales driven by a physical store presence should either not count toward the percentage rent calculation or should be tracked separately. This is still being litigated in many jurisdictions, and the percentage lease model continues to evolve.
Ground Lease
A ground lease conveys only the land. The tenant leases the land from the landlord, constructs improvements at the tenant's own expense, and maintains the property for the full lease term — which may run 30 to 99 years. At expiration, the improvements revert to the land owner.
Ground leases are used in several contexts:
- Development projects. A developer may ground lease land in a high-value urban location rather than purchasing it outright, preserving capital for construction.
- Fast food and QSR. McDonald's, Chick-fil-A, and many national QSR operators ground lease sites from landowners who prefer to retain ownership of valuable retail land.
- Institutional sale-leaseback. Universities, hospitals, and municipalities sometimes sell property to investors and simultaneously ground lease the land back, monetizing the real estate while retaining operational control.
Ground lease risk for tenants. The reversion clause — the provision that transfers improvements to the landlord at expiration — creates a genuine risk if the lease expires and the tenant has a functioning business in the building. Ground lease tenants should negotiate renewal options extending well beyond the expected useful life of the improvements, and should be aware of the financing challenges ground leases create (lenders are sometimes reluctant to finance improvements on ground-leased land without a non-disturbance agreement from the landowner).
Ground lease rent. Ground rent is typically a modest percentage of land value — 4–6% annually — because the tenant is bearing all construction and maintenance costs. Ground rent often escalates through periodic resets to appraised land value, which can create significant rent increases at reset dates.
How to Identify Your Lease Type from the Lease Language
The lease type is typically identified in the recitals or base rent section. However, labeling is inconsistent — many leases called "net leases" are actually modified gross, and many "gross leases" contain significant expense passthroughs. The authoritative way to classify a commercial lease is to read the operating expense provisions and ask:
- Is the tenant required to pay property taxes? (If yes: net element)
- Is the tenant required to pay building insurance? (If yes: net element)
- Is the tenant required to pay CAM or maintenance? (If yes: net element)
- Is there an expense stop or base year above which expenses pass through? (Modified gross element)
- Does the tenant pay a percentage of sales in addition to base rent? (Percentage element)
If all three of items 1–3 are yes: triple net. If none: gross. If some: modified gross. Add item 5: percentage. Stand-alone land with building constructed by tenant: ground.
Lextract's 126-field lease abstraction extracts and categorizes the lease type along with every operating expense provision — CAM definitions, base year, expense stop, caps, exclusions — from the lease PDF automatically. When you need to know exactly what structure you have before renewing, refinancing, or negotiating, the abstract gives you the answer in minutes rather than hours of document review. See what is commercial lease abstraction to understand how the extraction works.